The Most Disappointing Energy Stocks of 2015
Up until the end of 2014, most energy stocks looked like downright gold mines. The expansion of the commodities market through the past five years meant massive profits for some of the biggest names in the oil, natural gas, coal, and electricity market. Nothing good lasts forever, however, and the collapse of oil sent many companies into serious financial problems, up to and including outright bankruptcy. Indeed, no energy stock has managed to smell like a rose through 2015, but some have done far worse than others. Which stocks have given the worst returns in the energy industry, and is there any light at the end of the tunnel for investors?
The fifteenth-largest company in the world would, on paper, seem to be an excellent growth stock. Yet Chevron (CVX on the NYSE, trading for $85.72 a share) has done anything and everything except grow. Since reaching historic highs at $135 per share at the end of June 2014, they've tumbled down, down, down in the year since. Chevron has lost 20% of its total value since New Year's, suggesting that their capability to withstand oil volatility could jeopardize their stock valuation going forward. Chevron's economic success depends more on exploration and tapping new sources of oil rather than relying on existing wells due to the fact that they've invested heavily in the shale-oil boom. Shale oil wells have less abundance than traditional wells, usually tapping out a source in as little as one month, a problem that's further aggravated by the higher cost of oil extraction from shale rock beds. The confluence of high oil prices and difficulty in finding new extraction beds pushed Chevron's value down without much sign of a rebound on the horizon. How bad has their bottom line been? More dire than you may think. Compare Chevron's paltry $300 million in upstream earnings during 2015 Q2 against their earnings in 2014 Q2: the company saw a whopping 94% decline year over year. Few companies, even Fortune 500 companies, can absorb that kind of a hit and still keep functioning. It's to Chevron's credit that the company hasn't taken any drastic steps, such as mothballing their upstream segments, and are willing to eat the losses and wait for better news. That, however, has made their stock a portfolio poison.
Far less well-known than some of the oil giants trading on the New York Stock Exchange, Whiting looks particular bad as an investment option for several reasons. The first, and certainly most important, of these reasons is the company's rapid change of policy regarding their capital expenditure spending. In April, when the oil commodity market began a slow upturn, Whiting (WLL on the NYSE, trading for $19.18 a share) decided that they would amplify their capital expenditure in order to squeeze as much value out of the uptick as possible, putting aside $2.3 billion to commit to exploring and tapping new wells. Come May, however, their board of directors saw the increases of the cost of petroleum and issued an about-face, slashing capital expenditure from the budget in order to conserve cash flow and pocketing about $300 million of the capital expenditure to put their total output at about $2 billion. While such a decision is not, strictly speaking, a poor strategy, it suggests that the company has no concrete long-term plan to remain profitable while their sole product loses a lot of value. Whiting stock actually had modest gains from January up until April, but shares have been in total free-fall during the weeks since spring, losing almost 50% of their total value since June 1st. At the same time, Whiting announced they would curtail operations at three of their eleven Colorado oil rigs, dropping the company's output growth from a modest 7% to less than 5%. A company like Whiting that shows so little foresight shouldn't attract smart investors, unless they do so only to pump and dump and profit from the company's lack of foresight.
The oil bubble sent different companies in different directions in order to remain viable at a time when petroleum traded for as little as $40 per barrel. LINN Energy (LINE on the NASDAQ, trading for $3.14 a share) decided to take the most disastrous direction at every turn and has paid for it ime and time again. Look no further at the asking price of their stock less than 12 months ago: during October of 2014, LINN traded for over $30 a share. The 90% loss -- a second time for emphasis, NINETY PERCENT LOSS -- of their stock value lies on the shoulders of their decision to suspend their distribution and dividend. The move saved the company half a billion dollars, but completely pulled the rug out from under their feet by destroying what little confidence investors may hold in their operations. LINN's pyhrric victory will see them reduce their operating costs and debt, but may see the company forced off of the NASDAQ and onto the pink sheets. If their decision wasn't a disaster before, it certainly is now.
- There's plenty of reason to be negative about oil stocks given the uncertainty of the petroleum market. That said, the current environment is ripe with value choices. Royal Dutch Shell, for instance, represents a fantastic value buy since they're trading close to 52-week lows. Look at energy stocks with a strong P/E ratio (>10) that are trading at six to twelve-month lows to include for short-term growth.
- Companies with high investments in shale oil, such as the above-mentioned Chevron, will feel the tightest squeeze through the rest of 2015. Don't be suckered into buying these energy stocks even if they offer value or a strong dividend yield, since their long-term sustainability is in serious jeopardy.
- While oil companies have largely disappointed, natural gas prices have held steady. That's given mixed-energy companies like Exxon Mobile more stability. If your portfolio's individual stocks or mutual funds have a high degree of oil holdings, poor value can be mitigated with more diverse energy companies.