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Why These Three Oil Company Stocks Collapsed in December

Reuben Gregg Brewer, The Motley Fool

What happened

The shares of U.S. based ExxonMobil (NYSE: XOM) fell 14% in December, according to data provided by S&P Global Market Intelligence. Canadian oil and gas producer Vermilion Energy (NYSE: VET), with major operations in Canada, Europe, and Australia, saw its shares fall 13%. And the stock of PetroChina Company (NYSE: PTR), one of the largest energy companies in China, fell 11%.

And these aren't isolated examples. To varying degrees, most oil and natural gas drillers saw stock prices decline in the final month of 2018.

So what

The overriding driver in the energy space recently has been pretty obvious: oil prices. Brent crude, a global oil benchmark, fell a painful 20% or so in 2018, with most of that decline occurring in the final months of the year. December saw a particularly steep drop, with prices down around 10%. Put simply, in the back half of the year, oil quickly fell into a bear market, with investors fleeing the stocks that are tied to it.

A man writing in a notebook with an oil well in the background

Image source: Getty Images.

That said, Exxon, which took the worst hit in this trio, has been a laggard for a while because of weak production in recent years. Its third-quarter production numbers, however, showed sequential improvement over the second quarter. That was a key directional shift for the company that suggests its long-term plans are finally starting to bear fruit.

Although that's a good sign overall, it likely helped to exacerbate the stock's December decline. This is because the production improvement was driven largely by its onshore U.S. drilling efforts. West Texas Intermediate oil, a key U.S. benchmark, dropped even further than Brent Crude because production growth in the United States has overwhelmed the infrastructure needed to move it.   

Vermilion's big problem is a little different. This producer is spending heavily to continue growing production. But it has a material level of debt left over from the deep downturn that started in mid-2014. In November of 2018, management estimated that cash flow would just about cover the company's drilling efforts and dividend in 2019. However, as oil prices decline, that forecast starts looking increasingly tenuous. And that has investors concerned about the sustainability of Vermilion's hefty yield, which is now up to an impressive 10% (paid monthly) because of the stock's over 40% fall in 2018.

Like the other two names here, PetroChina's woes are largely driven by oil prices. But there's more to this story as well. The company's core focus is, as its name implies, China. The giant nation has for years been on an upward economic path. Although that remains true, the trajectory has been lowering. The end of 2018, meanwhile, saw increasing concerns about the fact that China's economy is decelerating even further, helped along by trade tensions with the United States. With basically all of its revenue generated in China, PetroChina would likely see an extra hit from a further economic deceleration. That, of course, would come on top of any impact from volatile energy prices.

Now what

The big story in the oil patch in December was clearly the swift decline in oil prices. That was the driving force behind the stock drops at Exxon, Vermilion, and PetroChina.

But stories usually aren't that simple on Wall Street. Indeed, each of these oil producers has more going on than just the price of crude, and investors need to look at each case when evaluating performance. December was a bad month for oil, to be sure, but don't let that blind you to the finer points behind an oil company's business and prospects.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.