Crude Drops 10% to Hit Five-Year Low, 3 Oil Stocks to Dump

The price of West Texas Intermediate (WTI) crude dipped to the lowest mark on Black Friday, ever since Sep 2009, after the international cartel of oil producers – Organization of the Petroleum Exporting Countries (:OPEC) – decided against an oil production cut on Thanksgiving Day. Following the drastic fall in crude prices, the shares of oil exploration and production (E&P) firms tumbled as NYSE reopened for abridged trading hours on Friday.

Why OPEC’s Decision Hits Crude Prices

WTI crude has been trading significantly below the $100 per barrel level since August this year. This was primarily owing to plentiful North American shale supplies in the face of lackluster demand expectations, sluggish growth in China and the prevailing softness in the European economy. Strengthening of the U.S. dollar also impacted the demand for greenback-priced crude as it is now expensive for importers to buy oil.

Amid the soft oil pricing scenario, most investors were expecting an output cut from OPEC as the move could have arrested declining crude prices. However, in a meeting at the Austrian capital of Vienna, the OPEC members formed a consensus to peg their production target at 30 million barrels per day as decided in Dec 2011. This eventually dragged oil prices further resulting in WTI crude falling more than 10% to settle at $66.15 per barrel on Friday.

OPEC’s Conclusion After the Vienna Meeting

Post-Vienna, the OPEC members finalized that their decision against production cut is not meant to affect the economy. The members – that account for almost 40% of the gross global crude production, as per the U.S. Energy Information Administration (EIA) − believe that oil producers will be able to generate a decent income even at such low crude prices. Furthermore, they can also invest out of savings to meet future demand.

Saudi Arabia, which holds the top spot in terms of total production among the 12 OPEC members, had already taken its stand against a production cut and had announced it publicly before the meeting in Vienna.

The decision might be a strategic move by Saudi Arabia to win an edge over U.S. shale producers. This is because shale oil, which has been witnessing large-scale production in the U.S over the last few years, is relatively expensive. Moreover, the life span of a shale oil well is considerably short and production from these wells is also comparatively tougher sans a regular flow of investment.

Hence, with the recent fall in crude prices it will be difficult for U.S. shale producers to garner sufficient earnings to sustain in the industry.

Why Oil E&P Stocks Suffer from a Dip in Crude Prices

The business of E&P firms is positively correlated to crude prices as the players generate revenues directly by selling crude to refiners and downstream players. Hence, with oil prices nose-diving, it will be difficult for the E&P firms to earn sufficient cash flow for shareholders.

Moreover, E&P firms are expected to lower their capital spending for upstream operations in the coming months and will continue to do so until crude prices recover substantially.

Oil E&P Stocks to Remove from Your Basket

Given that the primary business of crude oil E&P companies is likely to remain under pressure owing to the drastic fall in crude prices, it would be a wise decision to wash your hands of certain bottom-ranked stocks in this space if you are already holding them. If not, refrain from investing in these stocks as they are more likely to witness more downside in the near term.

Three such stocks are as follows:

Matador Resources Company (MTDR)

This Dallas, TX-based upstream energy firm is primarily involved in exploration, production and development of oil and natural gas assets located in the U.S. Currently, the company is operating mainly in the Eagle Ford shale play and Permian Basin, both of which are liquid-rich recourses.

Matador Resources fell roughly 17% to touch a 52-week low of $17.54 last Friday, hit by the plunge in crude prices. Moreover, last month, the company reported third-quarter 2014 earnings of 26 cents per share that failed to meet the Zacks Consensus Estimate of 30 cents.

Consequently, Matador Resources currently holds a Zacks Rank #5 (Strong Sell) implying that it will significantly underperform the broader U.S. equity market over the next one to three months.

Bonanza Creek Energy Inc. (BCEI)

This Denver, CO-based upstream company engages mainly in the exploration, production and development of oil and gas resources located in the state and Southern Arkansas.

The company also hit a 52-week low of $26.95 after its share plummeted almost 24% on Black Friday. Additionally, the company reported earnings of 40 cents per share in the third quarter of 2014, lagging the Zacks Consensus Estimate of 54 cents.

Currently, the stock carries a Zacks Rank #5.

Whiting Petroleum Corp. (WLL)

This Denver, CO-based company is primarily engaged in the exploration, development and production of crude oil, and natural gas and natural gas liquid. The company’s prime operation region includes the Rocky Mountains and the Permian Basin in the U.S.

Stocks of this company also tumbled more than 21% to slip to a 52-week low of $41.55 on Friday. Moreover, Whiting Petroleum’s third-quarter 2014 earnings of $1.24 per share, reported on Oct 29, missed the Zacks Consensus Estimate by a penny. The stock carries a Zacks Rank #5.

The Bottom Line

We don’t expect any immediate spike in crude prices amid oversupply of the commodity and lackluster global demand. However, we believe this slump is not here to stay forever, as the invisible hand of the market will eventually determine the right price of the commodity in the long run. This, in turn, will boost the prospects of oil E&P firms over the long run as crude prices gradually reflect positive momentum.

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