A Discount For Oil Investors

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Includes: APA, APC, AREX, AXAS, BHGE, BNO, CHK, CLR, COG, COP, CVX, DBO, DNO, DTO, DVN, DWT, EOG, EVEP-OLD, HPR, LGCY, LNGG, MCEP, MRO, NBL, OAS, OIL, OILK, OILX, OLEM, OLO, OXY, PXD, RRC, SCO, SZO, UCO, USL, USO, USOI, UWT, WLL, WTID, WTIU, XOM
by: Daniel Jones

Summary

In this article, I decided to look at some recent oil news that showed a very bearish picture for investors in the space last week.

While some pieces of data were positive, the rest were bad, but investors shouldn't forget about the long-term picture.

This may be an opportunity to nab some of your favorite stocks at a nice discount if you still believe in the bullish thesis.

This last week was not particularly kind for investors in oil and gas companies. After news broke from the EIA (Energy Information Administration) that crude and product inventories soared over a one-week period, prices of many firms dropped and stayed lower. In what follows, I will dig into the data provided, as well as some other data, and give my thoughts about what it should all mean for companies operating in this space moving forward.

Inventories skyrocketed

*Created by Author

According to the EIA, the crude oil picture for investors was anything but kind. If their estimates are correct, stocks of oil managed to grow by 3.3 million barrels, rising from 509.9 million barrels to 513.2 million. Though this isn't the largest seen over the past year, it represents a massive miss compared to the 3.3 million barrel decline forecasted by analysts and the 4.6 million barrel drop estimated by the API (American Petroleum Institute) a day earlier. In the graph above, you can see the trend that stocks have taken over the past 52 weeks and, in the graph below, you can see the same graph but zoomed-in on so that you can more easily see weekly fluctuations.

*Created by Author

While the market can probably absorb a crude stock build of that much, it wasn't the only category to show a worsening. Take, for instance, motor gasoline stocks, which also grew by 3.3 million barrels to close at 240.3 million. Distillate fuel stocks rose even more, climbing 4.4 million barrels to 151.1 million and propane/propylene stocks grew by 3.3 million barrels to 50.4 million. Residual fuel stocks increased 1.3 million barrels to 39.9 million, kerosene-type jet fuel and the "Other" category of petroleum products grew by 0.4 million barrels each to 44.6 million barrels and 284.9 million barrels, respectively, as well.

Thankfully, one category showed an improvement, but it was quite small. During the week, fuel ethanol stocks dipped by 0.8 million barrels, falling from 22.8 million barrels down to 22 million barrels. Despite this slight improvement, the sum of crude and petroleum product stocks soared by 15.5 million barrels for the week, shooting up from 1.331 billion barrels to 1.3465 billion barrels. That's quite an increase no matter how you look at it.

Falling production and weaker demand?

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Also in its press release, the EIA announced some other interesting pieces of data. During the week, for instance, they said that domestic oil production fell by 24 thousand barrels per day (or 168 thousand for the week), declining from 9.342 million barrels per day down to 9.318 million barrels per day. Of this, 20 thousand barrels per day (or 140 thousand for the week) came from the Lower 48 states, which is really interesting. In the graph above, you can see the trend that demand taken over the past 52 weeks and, in the graph below, you can see the same graph but zoomed-in on so that you can more easily see weekly fluctuations.

*Created by Author

While the production picture was slightly encouraging, the same cannot be said of demand. During the week, motor gasoline demand averaged 9.317 million barrels per day. This is far lower than the 9.822 million barrels per day seen a week earlier and is below the 9.568 million barrels per day seen the same time last year. Because of this, the four-week average for demand came in at 9.574 million barrels per day, 0.7% lower than the 9.639 million barrels per day seen the same period last year. Thankfully, even though distillate fuel demand was weaker during the week as well, its four-week average still came out to 4.026 million barrels per day, 1.8% above the 3.954 million barrels per day seen the same four weeks of 2016.

The rig count rose

More bad news came about, during the week, as a result of a further increase in the rig count. In the US, according to Baker Hughes (BHI), for instance, the oil rig count grew by another 8 units to 741. This is far higher than the 328 units seen a year earlier. Meanwhile, in Canada, the oil rig count popped higher by 23 units to 74. This is also materially higher than the 29 units seen in operating during the same week of 2016 and suggests that higher output could be around the corner.

Not a good week for oil investors

Every week, I cover a separate topic for oil investors so they can get a glimpse of the market as a whole. This week, I decided that it would be interesting to look at the performance, following this overwhelmingly bearish (but not all bearish) news, of oil and gas companies that are publicly-traded. In the table below, I listed all of the oil and gas companies I could think of (some have midstream and downstream operations as well and are not all just E&P firms).

Oil & Gas Stocks
1-Day 3-Day

Chesapeake Energy Corp. (NYSE:CHK)

-4.8% -1.4%
Whiting Petroleum (NYSE:WLL) -11.4% -12.0%
Approach Resources (NASDAQ:AREX) -9.8% -5.9%
Legacy Reserves (NASDAQ:LGCY) -10.1% -22.2%
Oasis Petroleum (NYSE:OAS) -11.1% -8.2%
Mid-Con Energy Partners (NASDAQ:MCEP) -4.9% -9.9%
EV Energy Partners (NASDAQ:EVEP-OLD) -4.9% -15.9%
Linn Energy (OTCQB:LNGG) -2.3% -4.5%
Bill Barrett Corporation (BBG) -8.1% -2.2%
Abraxas Petroleum (NASDAQ:AXAS) -4.1% -0.5%
ExxonMobil (NYSE:XOM) -0.4% 1.1%
Chevron (NYSE:CVX) -0.4% 2.1%
ConocoPhillips (NYSE:COP) -2.1% 0.8%
Marathon Petroleum Corp. (NYSE:MRO) -5.2% -2.6%
Anadarko Petroleum (NYSE:APC) -5.8% -4.2%
Noble Energy (NYSE:NBL) -2.3% 0.0%
Pioneer Natural Resources (NYSE:PXD) -2.2% 0.4%
Devon Energy (NYSE:DVN) -5.8% -3.9%

EOG Resources (NYSE:EOG)

-3.0% -0.8%
Range Resources (NYSE:RRC) -1.1% 2.8%
Continental Resources (NYSE:CLR) -4.7% -4.2%
Apache Corp. (NYSE:APA) -2.6% 0.6%
Cabot Oil & Gas (NYSE:COG) 0.5% 4.0%
Occidental Petroleum (NYSE:OXY) -1.2% 0.2%

What you can see by looking at this is that, in the day that the news broke, almost every single player of the 24 I could think of took a beating. Only 1 of the 24 firms, Cabot Oil & Gas, came out ahead for the day, rising by 0.5%. That's a win rate of only 4.2%. To close out the week, however, we did see some recovery among the names, with a total of 9 of the 24 players (or 37.5%) reporting an overall increase in share price from the time the EIA's news broke to the time the market closed on Friday. The biggest gainer was, again, Cabot.

There were, sadly, a number of losers. Faced with a downgrade, Legacy Reserves took the largest hit, falling 22.2%, followed very closely by EV Energy Partners. I bring these names up, though, because if you're like me, you'll be interested in knowing which energy prospects might be the most appealing contrarian picks. As I have said in the past, Legacy is my favorite firm in this space at the moment, but with so many having taken a hit, there are plenty of opportunities to examine.

Takeaway

Based on the data provided, the energy picture for investors over the past week was quite ugly. This is depressing as an oil bull but, personally, I'm not too worried. In a prior article, I outlined why I believe the market is overreacting to recent oil developments and I remain confident that, absent an economic downturn of some sort, the global energy picture is likely to improve in the weeks and months to come.

Disclosure: I am/we are long AREX, LGCY, WLL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own LGCYO and LGCY

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.