As the smart money continues to double down on the battered energy sector, it’s time for investors to also consider playing the contra trade.
In a past article, we highlighted how scores of billionaire investors were buying into the energy sector by betting that an oil price rebound is on the cards.
And they do have a valid point.
Some of the worst performers in 2018 have turned into big winners in the current year.
- General Electric was down 57% in 2018 but has gained 51% in the year-to-date;
- Applied Materials was down 36% last year ut is up 78% this year;
- Coty stock lost 67% last year but has clawed back some of the loss with a 78% YTD gain;
- Tyson Foods tumbled 34% in 2018 but has more than recouped the loss with a 78% gain so far this year;
- Perrigo, down 56% for 2018 and up 39% in 2019;
- Lennar lost 38% for 2018 but has rallied 52% this year.
Everybody loves a good turnaround story, and stocks like these that have managed to stage impressive comebacks make for interesting case studies.
Whereas there’s a fair chance that some of the worst performers in the energy sector could go from zeroes to heroes in the coming year, it’s important to bear in mind that it's never a good idea to buy a stock simply based on the fact that it’s down a lot. There’s usually a good reason why the market goes cold on certain companies, so due diligence is advised.
Below are some of the worst performers in the energy sector in 2019.
Worst Performing oil stocks with Market Caps Above $500M
Mid- and large-cap energy stocks tend to be more stable and less volatile than their smaller brethren. This can be of help during a major downturn.
Nevertheless, these four stocks have done the walk of shame that belies their size.
#1 Antero Resources Corp.
Market Cap: $666.4M
YTD Returns: -68.90%
Antero Resources Corp. (NYSE:AR) explores, develops and produces oil and natural gas with a strong focus on unconventional oil and liquids-rich natural gas properties. Poor and oil gas prices have weighed heavily on this company with the shares down nearly 70% in the YTD and 92.7% over the past five years. Related: Wanted: Oil Workers With More Tech, Less ‘Roughneck’
AR finds itself caught between a rock and a hard place; the company needs to keep production up to fulfill its pipeline commitments, but with energy prices remaining stubbornly low it’s unable to do so. Antero deals with dry natural gas from the Marcellus and Utica shales in the Appalachian region which are cheap to produce. Unfortunately, they sell cheap, too.
The company’s purchase of a third of pipeline capacity from Energy Transfer's (NYSE: ET) Mariner 2 East pipeline in a bid to transport dry gas and NGLs to the Gulf Coast where prices are normally significantly higher has not helped much with the entire country being awash in oil and gas.
Nevertheless, AR stock has lately received a boost, rallying 39% over the past five days after natural gas futures started rallying thanks to a new forecast of cooler winter temperatures. Talk of a big short squeeze.
#2 Tullow Oil Plc.
Market Cap: $962.94M
YTD Returns: -62.3%
Tullow Oil Plc (LON:TLW,OTCPK:TUWLF) is a UK-based multinational oil and gas exploration company. Tullow has established a reputation as one of the most successful wildcatters, with its September discovery at the Joe-1 exploration well being its latest.
The shares have been selling off heavily ever since the company the company published its latest trading update in November where the company downgraded its 2019 average production because of several issues in offshore Ghana, and also revealed that crude oil in offshore Guyana was of low quality including low API gravity (heavy crude) and with high sulfur content.
Despite the bearish sentiment, Tullow’s balance sheet is more rigid than was the case several years ago, with substantial cash flow to cover investing initiatives and also return some to shareholders.
#3 Oasis Petroleum Inc.
Market Cap: $848.3m
YTD Returns: -46.29%
Texas-based Oasis Petroleum Inc. (NYSE:OAS) is engaged in hydrocarbon exploration and fracking operations in the Permian Basin in West Texas.
The midstream producer has come under fire after issuing negative full-year guidance revisions as well as due to a pending lawsuit. OAS lowered the top end of full-year production guidance to 86.8K-88.5K boe/day from 86K-91K boe/day previously while raising capital spending outlook to $620M-$640M from $540M-$560M.
In January, the Wall Street Journal published an article that revealed that fracking wells were producing oil and gas at much lower rates than anticipated. This was further compounded when former Attorney General of Louisiana, Charles C. Foti, Jr., Esq. opened investigations on whether OAS breached their fiduciary duties to shareholders or otherwise violated state or federal laws.
#4 Occidental Petroleum Corp.
Market Cap: $34.8B
YTD Returns: -37.68%
Occidental Petroleum Corp.’s (NYSE:OXY) heavy selloff makes it one of the biggest losers in the energy sector after shaving off $21 billion of its market cap.
The Houston-based midstream player has fallen out of favor with the investing world after its $55 billion acquisition of Anadarko with activist investor Carl Icahn criticizing the heavily leveraged deal. The shares are now hovering at 15-year lows. Related: Trump Follows Up On His Promise To Protect Syrian Oil
OXY though has already kicked off a heavy deleveraging drive through sale of assets in a bid to lower the $40 billion debt incurred on the M&A deal. So far the company has raised $10 billion through sales of properties in Africa and has targeted $15 billion in proceeds by mid-2020.
Worst performing oil Stocks with Market Caps Below $500M
Small-cap energy stocks have fared worse than most, which is to be expected in a market downturn since they are also heavily leveraged. Here are the worst performing small-cap energy stocks:
#1 McDermott International Inc.
Market Cap: $145.4M
YTD Returns: -88.11%
McDermott International Inc.(NYSE:MDR) is a multinational procurement, engineering, construction and installation company based in Texas. The shares have sold off heavily after the Wall Street Journal reported that MDR was working with turnaround consulting experts AlixPartners, raising suspicions that the company was facing bankruptcy. MDR has been struggling to remain profitable in recent quarters
Nevertheless, the company’s management remains optimistic of a positive turnaround and has promised a "sharp improvement" in operating income by the end of 2019.
#2 Seadrill Ltd.
Market Cap: $118.0M
YTD Returns: -85.95%
Seadrill Ltd. (NYSE:SDRL) is a UK-based deepwater drilling contractor. The company emerged from Chapter 11 bankruptcy on July 2, 2018, but has continued to struggle with a huge debt load. Seadrill's debt (current and non-current and ship finance lease payment) of $6.88 billion is huge for a company its size (contract backlog of $1.8B) though none of it is due before 2022 after the company successfully undertook some restructuring.
#3 Pacific Drilling S.A.
Market Cap: $219.0M
YTD Returns: -77.60%
Pacific Drilling S.A.(NYSE: PACD) is an offshore ultra-deepwater drilling specialist headquartered in Luxembourg. The company has been badly hurt by the end of the lucrative Pacific Sharav contract which it undertook on behalf of Chevron Corp.(NYSE:CVX). The contract had a dayrate of USD555,000.
Despite the selloff, PACD remains one of the top deepwater drillers with an impressive resume and high-profile clients such as Chevron, ENI, Total, Petrobras and Equinor.
Other notable underperformers include:
- Valaris; YTD Returns -62.5%
- Nine Energy; YTD Returns -72.58%
- Whiting Petroleum; YTD Returns -72.01%
- Renewable Energy; YTD Returns -28.72%
- FTSI International; YTD Returns -84.53%
- Southwestern Energy Corp.; YTD Returns -37.83%
- Concho; YTD Returns -22.25%
- Peyton; YTD Returns- 48.64%
By Alex Kimani for Oilprice.com
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