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What happened

Shares of oil drillers Occidental Petroleum (NYSE: OXY), Continental Resources (NYSE: CLR), and Kosmos Energy (NYSE: KOS) tumbled more than 20% in September, according to data provided by S&P Global Market Intelligence. All severely under performed the S&P 500, which was only down 3.9% for the month.

Of the three companies, Occidental — which also has some transportation, storage, and refining capacity — saw the smallest drop, of just 21.4%. Shares of Continental Resources, which primarily operates in Oklahoma and North Dakota, fared slightly worse, dropping 28.5%. The much smaller Kosmos Energy, a deep water explorer, fared the worst, with shares tumbling 33.6%.

So what

The entire oil industry had a rough September. The SPDR S&P Oil & Gas Exploration and Production ETF, which is a good measure of oil drilling stocks as a whole, was down 18.3%. So, to a certain extent, Occidental, Continental, and Kosmos were victims of an industry wide trend.

That trend was the result of some bad news about oil supply and demand, which conspired to tank oil prices during September. Early in the month, numerous U.S. drillers began to increase their rig counts, which led to expectations of supply increases. Then, on Sept. 7, Saudi Arabia announced it was cutting the price of crude oil shipments to Asia, the country’s largest export market. Oil prices tumbled over the next few days, sending all three drillers’ shares down by double-digit percentages.

Oil prices stabilized as Hurricane Sally headed for landfall in the Gulf of Mexico, where much of the U.S. oil and gas infrastructure is located. Markets assumed that capacity would be impacted in the aftermath of the storm. Any improvement in oil prices, though, was offset by Libya’s announcement on Sept. 22 that it would raise its oil production levels to 260,000 barrels per day, an increase of about 160%.

Oil prices finished the month up, but were sent into a tailspin again during the first two days of October as U.S. government stimulus negotiations seemed to break down and President Donald Trump announced he had contracted coronavirus.

Now what

Beyond the industry’s woes, Occidental, Continental, and Kosmos each are experiencing their own set of issues weighing down their respective stocks.

Occidental outbid rival Chevron to acquire Permian producer Anadarko Petroleum last year. Now, however, it looks like it overspent, and subsequent spending to keep itself afloat during the pandemic has caused the company’s net debt to soar nearly 340% over the past year. That balance sheet has investors justifiably worried, although a recent deal to sell its onshore Colombian assets and other positive financial news may mean the company is turning a corner (although its balance sheet is still a long way from healthy).

Continental, meanwhile, is being weighed down by its geographic mix. The company’s production is limited to the SCOOP/STACK plays in Oklahoma, and the Bakken Shale, which is mostly located in North Dakota. However, oil prices in those two regions have consistently lagged U.S. benchmark WTI Crude prices. In September, for example, the highest price for a barrel of WTI Crude was more than $41 per barrel. But Oklahoma Intermediate crude never rose above $39 per barrel, while North Dakota’s Williston Sweet crude never traded above $34 per barrel.

Deepwater driller Kosmos, which operates off Africa’s shore and in the Gulf of Mexico, took it on the chin as Hurricane Sally moved through the Gulf, but that’s not the worst news for the small company. With more than $2.1 billion in debt on its balance sheet, and a debt-to-equity ratio of 3.2 (higher even than Occidental’s), Kosmos needs oil prices to rise so it can fund its operations and pay down its debt. The company just restructured $200 million of debt, but it can’t kick the can down the road forever.

Investors would be smart to avoid these three companies, and the oil production industry altogether, until there’s a clear light at the end of the tunnel.


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