The oil market has experienced insane volatility this year. Prices have gone from over $ 60 a barrel to negative territory. Crude oil has since rebounded from this incredible low as speculators bet demand will pick up as the blockages of COVID-19 end.
However, with US oil prices still below $ 20 a barrel, and significant storage problems ahead, oil stocks face a long road to recovery. Many have already gone, while many more will likely join them in the coming months. With the risk of a bankruptcy wave, investors should exercise caution in this sector. Here are five stocks of oil that I would avoid at all costs.
1. Energy Chesapeake
Chesapeake Energy (NYSE: CHK) is dangerously close to filing for bankruptcy. Reuters announced earlier this week that it is preparing a potential deposit as a way to restructure its huge debt. The company owes nearly $ 9 billion to its lenders, including $ 300 million in debt maturing this summer. Although the company can restructure its debt outside of bankruptcy, it is still not worth buying. Its management team has done an excruciating job over the years of managing shareholder capital because of its sole growth objective.
2. Western oil
Occidental Petroleum (NYSE: OXY) is another mismanaged oil company. The leaders who ran the producer so desperately wanted to buy Anadarko Petroleum last year that they outbid Chevron of $ 5 billion, allowing the oil giant to leave with breaking costs of $ 1 billion. They also walked around the shareholders to close the deal, which put a lot of debt on the company and a expensive financing contract with Warren Buffett. This strategy has since failed due to the collapse of the oil market. Western had to reduce your dividend and start paying Buffett in stocks, diluting existing investors. The company has dug a hole so deep that it may never recover.
3. Continental resources
Continental resources ” (NYSE: CLR) the founder, Harold Hamm, contributed to the American oil revolution by directing the development of the Bakken shale. However, he allowed his optimism to blind him to the volatility of oil prices. he cashed too early in the company’s petroleum hedges during the 2014 oil crash and entered the current market downturn without any price protection. As a result, Continental recently had to close almost all of its operations in North Dakota because its wells were losing money. Hamm’s movements repeatedly hampered the business, destroying shareholder value in the process.
Transocean (NYSE: RIG) is one of the world’s largest offshore drilling contractors. Unfortunately, he has a corresponding debt profile. It currently has $ 8.6 billion in long-term debt, of which $ 4.3 billion is due over the next two years. These short-term maturities will be difficult to refinance, given junk credit and the fact that a rival recent bankruptcy, while another seems likely to follow. These problems could plunge the offshore driller into bankruptcy with his peers.
5. American Oil Fund
the American Oil Fund (NYSEMKT: USO) is a exchange traded fund which tries to follow the daily fluctuations of the main benchmark oil price index in the United States. However, he dirty work. Instead of holding physical oil, it trades oil futures. He often needs to pay money to transfer them into the future, which erodes his income. It is therefore not surprising that the fund has lost almost all of its value over the years. Another crude oil price plunging into negative territory could lead to the implosion of this petroleum ETF.
While oil prices could go up, these oil stocks are likely to run out
Oil stocks are generating a lot of interest these days. The general thesis is that what went down must go back up. Although I too believe that oil prices will eventually rebound, I think there will be a lot of carnage in the oil sector before that happens. This is why I think investors should be cautious, as many oil stocks – including most of this list – are unlikely to survive this slowdown.