The crude carnage brought no respite even after the recent flare up of the Saudi-Iran imbroglio. The multi-year carnage has spared neither the largest energy infrastructure company Kinder Morgan Inc. KMI nor the fringe players like Archrock Inc. AROC.
False Hope for Crude?
The Middle East geodynamics gave the entire world a headache when Saudi Arabia executed a prominent Shiite cleric on Saturday. Although the region is the epicenter of global crude production, the commodity showed only an odd spike before fizzling out to below $37 a barrel.
We are not pinning hope on this ethnic flare up to provide any real stimulus to the beleaguered commodity. This is because the stakes are high internationally to prevent any further heightening of tension between the two founding members of the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers.
The West Texas Intermediate (WTI) oil futures are currently trading at around $36 per barrel. A quick flashback will show how crude prices hurt the broader markets almost on a daily basis in 2015. It is quite natural that oil investors can only wish for a recovery in 2016. However, we see no such reason to keep expectations high for a miraculous oil price recovery.
Crude Carnage Recap
Oil has been the most perplexing commodity of 2015 with big busts and occasional rises seen in a very short period of time. Since mid-2014, the commodity’s price has been plunging, primarily due to excess supply of crude in the global market.
The shale boom turned the U.S. into an oil-surplus economy from a crude-deficit region. Along with the U.S., the OPEC also pumped up more crude. All these events led to a global oversupply of the commodity and pushed oil to its multi-year lows.
No Route to Recovery?
The question coming first to the minds of investors ravaged by over-a-year long crude carnage pertains to the end of this rout. U.S. crude futures witnessed a fall from the skies from Jun 2014 ($107 per barrel) to the deep pit of around $34 per barrel until recently.
An easy solution may have been reducing output. But one wonders what stopped the big oil producers from cutting production in 2015, when the measure could have taken crude back to its glorious days of the first half of 2014.
Looking back, a war for market share has been raging among the likes of OPEC, the U.S. and Russia. Each of these markets has been pumping hard and competing for market share, completely ignoring the downtrend in oil price. On top of that, at the December meeting in Vienna, OPEC decided not to cut oil production. Instead, the cartel raised its production ceiling to maintain market share.
This early-December decision dealt a huge blow to the energy market. The shockwaves from that decision is affecting the commodity to date.
Overall, the picture is not in favor of an oil price recovery in 2016. The major determinants of the fate of the black gold include any further flare up of the Saudi-Iran imbroglio, OPEC’s production trend in an already oversupplied market and the weakness in Chinese economy.
In this backdrop, we have identified five stocks that have paid a bitter price irrespective of their underlying fundamentals and have suffered heavy losses on the bourses.
Kinder Morgan Inc.
Texas-based Kinder Morgan, Inc. is one of the largest energy infrastructure companies in North America. The company operates approximately 80,000 miles of pipelines transmitting natural gas, refined petroleum products, crude oil, carbon dioxide and additional products. It has more than 180 terminals that store petroleum products and chemicals, as well as ethanol, coal, petroleum coke, gasoline, jet fuel and steel.
The partnership with approximately $34 billion of investor wealth has lost more than 64% of its value over the past one year. Also, the stock delivered negative earnings surprises in two of the last four quarters, with an average miss of -9.04%. However, over the last 60 days, 7 estimates for full-year 2015 have been slashed, lowering the Zacks Consensus Estimate by 8 cents to 61 cents.
Houston-based Archrock is a pure-play U.S. natural gas contract compression services business and a leading supplier of aftermarket services to customers that own compression equipment in the United States. The company operates in the major oil and gas producing regions in the United States and has approximately 2,500 employees.
Oil price shocks have been pronounced for this domestic stock, which has lost more than 77% of its value over the past one year. The stock delivered negative earnings surprises in two of the last four quarters, with an average miss of 112.57%.
Plains All American Pipeline, L.P. PAA
Houston-based Plains All American Pipeline, L.P., a master limited partnership (MLP), is involved in the transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids and refined products in the U.S. and Canada. The partnership has operations in the Permian Basin, South Texas/Eagle Ford area, Rocky Mountain and Gulf Coast in the U.S., and Manito, South Saskatchewan, Rainbow in Canada.
The stock is down more than 53% over the past one year – feeling the deep pain of analysts’ pessimism – curtailing the Zacks Consensus Estimate for 2015 by 20 cents over the past six months to $1.02. The stock delivered positive earnings surprises in only one of the last four quarters, with an average beat of -0.85%.
EV Energy Partners, L.P. EVEP
EV Energy Partners L.P., also based in Houston, is an MLP created by EnerVest Management Partners, Ltd. and Encap Investments L.P. The MLP is focused on acquiring, developing and producing from oil and gas properties primarily in the Appalachian Basin, Michigan, Mid-Continent and Permian Basin regions. Proved reserves as of year-end 2014 were 1.0 trillion cubic feet equivalents (71% gas and 84% developed).
The partnership with $137 million of investor wealth has lost more than 86% of its value over the past year. Ironically, the stock has delivered positive earnings surprises in three of the last four quarters, with an average miss of -78.06%. However, over the last 60 days, two estimates for full-year 2015 have been slashed, lowering the Zacks Consensus Estimate by 52 cents to $1.86.
Warren Resources, Inc. WRES
Warren Resources, Inc. is an independent energy company engaged in the acquisition, exploration, development and production of domestic oil and natural gas reserves. Warren’s activities are primarily focused on oil in the Wilmington field in the Los Angeles Basin in California, and on natural gas in the Marcellus Shale in Pennsylvania and the Washakie Basin of Wyoming.
Oil price shocks have been pronounced for this domestic stock, which has lost more than 87% of its value over the past one year. Over the past six months, the Zacks Consensus Estimate for 2015 has fallen by 14 cents to a loss of 92 cents. The stock delivered positive earnings surprises in two of the last four quarters, with an average beat of 18.35%.
With the commencement of domestic oil exports and no hope for OPEC’s production cut, we can safely predict continued crude oversupply in 2016. Also, the Chinese economy in spite of stimulus measures has a long road to recovery. This adds up to another bearish market for oil in the New Year.
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