Oil plays a big part in our energy infrastructure, and the recent decision by OPEC to keep production at the current level to drive the price of oil down has had an effect on many North American oil producers. Deciding to keep their production level intact simply means that OPEC wants to see the price of oil go down to put pressure on North American producers. It is well known that at the current oil prices, oil sands producers do not make as much of a profit if any. By keeping production output the same, OPEC keeps inventory high, which brings prices down. With lower prices, different opportunities can arise for many countries to import and store cheaper oil while impacting the profitability of oil sand drilling in the short term.
It’s important to understand that within OPEC, there are countries that suffer from the low prices, and OPEC will not be able to maintain this level of production for a very long period of time. I believe their goal is to create some disruption by slowing down the drilling of expensive oil in order to retain its position as the primary oil exporter. If the US were to be self-sufficient with their energy, it could flip from an importer to an exporter and change its dependence on some countries. It would create a different dynamic in the international markets.
5-Year Oil Price Graph
The current price of oil is really nice for consumers filling up at the pumps but as you can see from the graph above, the average over the past 5 years has been around $90 and we should assume that it will go back up there. The big question is when and how much damage would it have done to some companies.
The Effect of Low Oil Prices
Simply put, investors have quickly adjusted the stock price of many companies by forecasting lower profits. Here is how many companies have done since June 2014 when oil prices made the 52-week high.
- Exxon Mobil (XOM Trend) – Down 7.66%
- Chevron (CVX Trend) – Down 10.73%
- ConocoPhillips (COP Trend) – Down 16.07%
- Suncor Energy Inc. (SU Trend) – Down 20.11%
- Canadian Natural Resources Limited (CNQ Trend) – Down 22.78%
- Imperial Oil Limited (IMO Trend) – Down 7.39%
- Husky Energy Inc. (HSE Trend) – Down 34.32%
- Cenovus Energy Inc. (CVE Trend) – Down 28.02%
One fact I can conclude is that Canadian oil producers have seen their stock impacted a lot more than their US counterparts. It highlights the fact that Canadian oil is more expensive to reach. Smaller companies have been even more impacted as they are even more exposed to oil sands drilling. One such company is Crescent Point Energy (NYSE:CPG), which saw its stock price go down by 40%.
The facts are there; oil prices can change up or down. Not discussing the impact of consumers, the bottom line for energy companies is there. As an investor, it’s a reminder to not put all your eggs in one basket. For example, non-oil producers involved in the energy distribution such as Enbridge (NYSE:ENB) (ENB Trend) and TransCanada Pipeline (NYSE:TRP) (TRP Trend).
Stay The Course
Keep your shares as the oil prices are bound to bounce back. Patience is key here. Is the dividend at risk? Are you purchasing more shares with each payout?
Buy More Shares
Prices are down; any contrarian investor would buy more shares into a well managed company. Low oil prices are not sustainable within all OPEC members so it’s only normal that we can expect them back up. When, is the question, and are you prepared to wait?
At this point, you would probably take a loss. If you have lost all faith in the company and its future, then it may be what needs to happen. If you do sell and it’s in a taxable account, you may be able to offset the capital loss against a capital gain.
Future Dividend Adjustments?
Is the dividend at risk? It very much depends on the company and its dividend payout plan and ability to increase it temporarily. It will definitely stress the finances of companies not as profitable or well capitalized.
Risk of Bankruptcy?
It’s always there for smaller companies that have leveraged themselves to drill and explore. If their assets are good and have value for another company, the company would probably be acquired in the process.
Personally, I have quite a diversified portfolio and will stay the course with my current energy holdings. I am considering adding to Suncor Energy as I do not have much and they have become more investor-friendly with dividend growth and share buybacks. CPG is a holding I have for income and the dividend yield is now above 10%… It’s not sustainable if the money doesn’t come in, but I have to admit that I could be satisfied with 5% for this income portfolio. If low oil prices persist for many years, CPG will have to change or I would need to revise my position. At this point, it’s too early to make any rushed decisions. My dividends buy back more shares, which pays me more dividends. Paid to wait!
Disclaimer: Long SU, COP, ENB, TRP. Income-oriented CPG.