Why Oil and Gas Stocks Are On Fire Today
What happened
So what
Oil prices approached a six-week high on Monday as investors
have started growing a bit more optimistic about the sector's prospects.
Fueling today's bullishness was rising hope that the U.S. and China will
resolve their trade dispute, which has been weighing on oil demand. In addition
to that, Saudi Arabia continues to make progress on the initial public offering
of its national oil company, suggesting that investors are warming up to the
idea of buying shares.
The rise in oil is fueling big gains in beaten-down oil
stocks because they need higher prices to boost their fortunes. Oil producers
like Centennial Resource Development, Whiting Petroleum, and Extraction Oil
& Gas stand to benefit the most from higher oil prices since they make
money by selling oil. That would give them more money to use for things like
paying down debt and buying back stock.
Extraction Oil & Gas, for example, bought back $100
million of its shares during the second quarter while also retiring $14 million
of debt at a 23% discount to face value. With oil prices improving, the company
should generate more cash, which it can use to buy back additional shares and
retire more debt.
Whiting Petroleum, meanwhile, has been using a combination
of free cash and noncore asset sales to pay down debt. With oil moving higher,
it could enable Whiting to accelerate its debt reduction program.
Centennial Resource Development, on the other hand, has been
plowing all its cash flow into drilling more wells. Unfortunately, the slump in
crude prices earlier this year forced the company to slow its growth rate.
However, with oil prices picking back up in recent weeks, it might be able to
reaccelerate in 2020.
Higher oil prices could also boost the fortunes of oil-field
service companies like Noble and U.S. Silica. As a leading offshore driller,
Noble benefits when oil companies spend more money on drilling new wells, which
they'd be more comfortable doing if oil prices were higher. U.S. Silica,
meanwhile, would also benefit from the increase in drilling activity that often
comes with higher oil prices since it would boost demand for the sand it produces
to frack new wells.
Now what
Investors are starting to grow a bit more optimistic about what lies ahead for the oil market, which is pushing prices higher. That's good news for the sector's weaker links, as they need higher oil prices to boost their financial results. The concern, however, is that oil market sentiment can change quickly, which is why investors shouldn't buy these oil stocks on the hope that crude prices will continue rallying -- because that might not happen.