Bankrupt Energy Stocks Leading The Short Squeeze Rally

Summary

• Energy stocks that have filed for Ch.11 or are about to have led the recent 'short squeeze' rally.
• There are names that are fundamentally solid that have moved higher as well, but a short-term correction looks more likely.
• Buyers should not be fooled by the large price movements. There are companies that won't survive regardless of the recent price moves.
• Looking for a helping hand in the market? Members of HFI Research get exclusive ideas and guidance to navigate any climate. Get started today »

Welcome to the what is this edition of Oil Markets Daily!

Ever since last week Monday, energy stocks that have already filed for Ch.11 or are about to have squeezed so much higher that it boggles the mind just to look at them.

Take Whiting (WLL) for example, with breakeven in the long-run of $60/bbl WTI, its stock is up ~100% just today.

The company has already filed for Ch. 11 with equity holders getting only ~3% of the reorganized shares. But the stock continues to surge because this rally isn't based on fundamentals.

Now, while the entire pack rallies, there are some names that are truly deserving of the recent gains, while others like Whiting shouldn't. Take Baytex (BTE) for example, and one of our long holdings, the company doesn't have a bank line redetermination until 2024, and with long-run breakeven at $43/bbl WTI, we think Baytex's recent performance was warranted.

Now, as for the short-term price move, Baytex's stock has more than doubled leading to very overbought conditions. The stock appears to be trying to fill the gap left behind from the March sell-off at C$1.03. At least in the short term, we think Baytex holders can take profits once the gap is filled, and re-enter at C$0.68 which is where the lower gap level is.

Aside from Baytex, another name we particularly like is Cenovus (CVE). But the recent "junk" led rally has also started to extend solid names like CVE a bit too far.

Cenovus has filled the gap left behind from the March sell-off while the downside gap is left unfilled. Given the recent overbought conditions, we think taking profits here and re-entering in a sell-off makes sense.

Don't be misled by the rallies

There are times when market moves don't make a lot of sense. So, the market adage that "markets are always right" doesn't really apply in a scenario where the short-sellers are now forced to cover.

This has led to some crazy energy stock rallies over the last week that can't be justified via fundamentals. So, those that have benefited from the recent rally should take caution at least in the short term.

Last Friday, we wrote that "Energy Stocks Remain A Buy Despite Strong Performances In The Last Month," we disclosed all the energy stocks we are long. While our stance that energy stocks continue to be a buy for the medium to long term, the dramatic short-term move is leaving us a bit hesitant. Don't be fooled by the rallies, some names won't make it regardless given the crunch down from the banks.

Analyst’s Disclosure: I am/we are long BTE, CVE. 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.