7 Oil Stocks That Are Struggling to Survive: CHK, APA, CPE


Using the Energy Select Sector SPDR ETF (NYSEARCA:XLE) as a barometer, it’s accurate to say oil stocks are enjoying a near-term renaissance. XLE, the largest exchange-traded fund dedicated to the energy sector, climbed 24% higher this month.

That’s undeniably good news, although recent price action has shaken up the chart. But this news isn’t perfect. The issue is the point from which oil stocks are rallying, and how much more work they have to do. Year-to-date, each of the 10 worst-performing ETFs either have some oil exposure or are directly linked to crude.

With prices still low and demand only recently showing signs of life, the energy sector still has a lot of work to do to reclaim lost glory. Another issue to consider is the resiliency of some energy companies. No, the likes of Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) aren’t on the brink. But some energy producers are.

Here are seven oil stocks investors should sell now.

  • Chesapeake Energy (NYSE:CHK)
  • Apache (NYSE:APA)
  • Callon Petroleum (NYSE:CPE)
  • Extraction Oil & Gas (NASDAQ:XOG)
  • Gulfport Energy (NASDAQ:GPOR)
  • Nabors Industries (NYSE:NBR)
  • SM Energy (NYSE:SM)

Oil Stocks: Chesapeake Energy (CHK)

Oil Stocks: CHK

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Chesapeake Energy has been making some jaw-dropping moves higher. That makes it difficult to say the stock should be shorted from here. Add to that, this oil stock notched a roughly nine-fold jump off its 52-week low.

Like some of the other beaten-up names in the energy patch, Chesapeake got a lift on news that OPEC agreed to a production cut. Those headlines are always catalysts for oil equities. But the trick is getting all the cartel’s member states to actually comply.

OPEC cuts are not enough to eradicate Chesapeake’s mountain of liabilities and the issue of an imminent bankruptcy filing. When it comes to ability to survive, this is one of the more challenged names in the sector. And, if a Chapter 11 filing happens, Chesapeake becomes beholden to creditors while common equity investors get wiped out.

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Apache (APA)

Oil Stocks: APA

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Exploration and production firm Apache is another oil stock that’s notching a stunning rally. In this case, the stock more than quadrupled in less than three months. The chart indicates if the 200-day moving average is taken out, more upside is available.

Apache isn’t anywhere close to as imperiled as Chesapeake is, but in this environment, credit is leading equity. What that means is that companies need to oblige bondholders with better cash flow and stronger balance sheets. Moody’s Investors Service has some doubts about Apache, as highlighted by a recent downgrade that took the energy producer into junk territory.

“The downgrade of Apache to Ba1 reflects our expectation of higher leverage on production and reserves that we don’t expect to reverse over the medium term,” said Pete Speer, Moody’s Senior Vice President. “The company’s returns and cash flow based leverage metrics will improve in line with the recovery in oil prices, but those metrics position Apache more in line with Ba1 rated E&P peers.”

Callon Petroleum (CPE)

Oil Stocks: CPE

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Callon Petroleum is another prime example of the dash for trash currently underway in the energy sector. The stock more than doubled over the past week and is up more than six-fold from its March lows. All that good work — to become barely better than a $2 stock. Decide what you want: three shares of Callon or a trip to Starbucks (NASDAQ:SBUX).

Jokes aside, the New York Stock Exchange warned Callon about its sub-$1 share price in April, meaning another big down move could result in a reverse split.

Like so many energy names in 2020, the story with Callon largely revolves around cutting costs and bolstering the balance sheet. Cost-cutting for many of these companies was necessary, but what it necessitates dialing back on exploration and production. Restarting production in shale plays isn’t easy. It’s not like turning a light on, which makes it difficult for operators to rapidly take advantage of rising oil prices.

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Extraction Oil & Gas (XOG)

Oil Stocks: XOG

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Extraction is an oil and natural gas producer primarily operating in Rocky Mountain-area shale plays. And XOG stock more than doubled in early June, bringing it back above $1 a share.

However, viability is a real concern — especially as shares have already started to head south.

As noted above with Apache, credit is taking on added importance in this climate, and when it comes to Extraction’s credit profile, it’s rather bleak. In fact, time is running out for the company to avoid default.

A recent downgrade by Moody’s of Extraction to C “follows Extraction’s election to skip its May 15 interest payment on its 2024 senior unsecured notes as the company evaluates strategic options to restructure its capital structure and bolster its liquidity,” said John Thieroff, Moody’s senior analyst. “If the company fails to cure the missed interest payment within the 30-day grace period, it will be in default.”

Ratings in the C spectrum imply elevated risk of default.

Gulfport Energy (GPOR)

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Recent strength in Gulfport Energy is legitimate on the back of the aforementioned OPEC supply cuts and the company’s own efforts to conserve capital. The company’s strategy is now to push off output into the latter stages of this year and into 2021 to capitalize on what it hopes will be higher energy prices.

“As it relates to our outlook for 2021, under a maintenance level program, we would expect to invest approximately $300 million of capital spend to maintain a similar level of year over year production,” said Gulfport President and CEO David Wood.

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The strategy is reasonable, but with that and OPEC cuts baked into this stock, near-term catalysts are limited to higher oil demand and prices. Additionally, given the gas-intensive nature of Gulfport’s production stream, it would take a hotter-than-expected summer for prices to rally.

All of that is to say this remains a risky stock.

Nabors Industries (NBR)

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Don’t be fooled by the nearly $84 price Nabors Industries hit earlier in June. That’s the handiwork of a reverse split implemented in April — one that was necessary because oil services stocks, like NBR, are highly correlated to crude prices.

To its credit, Nabors is implementing an array of cost-cutting measures, including reductions in executive pay and capital spending as well as suspension of its dividend.

Here’s what makes this a risky near-term idea. With so many producers cutting exploration budgets, demand for the goods and services offered by oil services companies is bound to wane. It could take a sustained oil bull market to bring some of that need back online.

SM Energy (SM)

wll stock

Source: Shutterstock

SM Energy is yet another example of a rallying oil stock with dreadful credit fundamentals. Last month, the company said it’s issuing new debt, exchanging new bonds for old ones at a 35% to 50% discount to par, meaning investors holding SM’s old bonds are taking quite a haircut.

How does a company compel a creditor to take what appears to be a lousy deal? Often by offering convertible notes, which can later be converted into common stock. Great for the bondholders, assuming the stock appreciates, but bad for equity investors because the influx of new shares dilutes previous shareholders.

All of this financial engineering, which SM is within its rights to orchestrate, landed the company with a Caa1 credit rating. That’s simply terrible.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.





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