Energy

Wall Street Flushes Oil and Gas Leaders on Price War and Coronavirus Fallout

Jon C. Ogg

Published: March 9, 2020 1:47 pm

Last Updated: March 9, 2020 1:59 pm

Investors in the oil and gas part of the energy sector can pick just about any bad cliche they want to when it comes to industries at this time. With the coronavirus knocking demand for oil likely into a negative demand for 2020, you can now add on a Saudi-Russia price war after last week’s OPEC+ meeting went about as badly as it could have gone. The move is going to be a game-changing one for any company that is tied to the price of oil, but it’s also spilling over to other areas that have affiliations with the sector. That means its bankers, energy debt holders and even alternative energy players, as they are now just that much less competitive against lower gasoline and energy prices.

24/7 Wall St. has tracked more than 35 analyst downgrades in the oil patch on Monday. Most of these now have Neutral/Hold ratings, with some Sell/Underperform ratings too, but even the stocks that were maintained with a Buy rating saw target prices slashed on Monday. Goldman Sachs has now warned that, under the worst cases, oil could drop close to $20 per barrel. That’s a lose-lose situation for even the strongest of oil giants. A report from DNB Bank in Norway has warned that this will turn into an outright price war, and a portfolio manager at Tortoise sees shale producers having an entire year of lost cash flows.

Credit Suisse chose to actually raise Phillips 66 (NYSE: PSX) to Outperform from Neutral, but it downgraded Delek US Holdings Inc. (NYSE: DK) to Neutral from Outperform. On Phillips 66, the firm believes it is much better suited to handle lower-margin refining environment than Delek, which has historically relied on wider Permian diffs to produce positive free cash flow. The firm now sees further narrowing of in-land diffs acting as a headwind for Delek. Valero Energy Corp. (NYSE: VLO) is also noted as more positive view in the sector. Delek was down 26% at $12.64, while Phillips 66 shares were down “only” 6% at $65.10. Valero was last seen down only 4.55 at $60.25.

Merrill Lynch also has announced that oil is going to have to adjust to a bleak new reality of lower oil prices and that the Russia-Saudi price war changes everything. Shares of Exxon Mobil Corp. (NYSE: XOM) were maintained as Buy at Merrill Lynch, but the firm cut its target to $75 from $99. Exxon stock traded down over 15% at $40.20 on Monday morning, and that is after a 4.8% drop to $47.69 on Friday, but the drop had narrowed to 9.2% as of mid-Monday afternoon. Exxon would now have an indicated dividend yield of 8.6%. Merrill Lynch maintained Chevron Corp. (NYSE: CVX) as Underperform but lowered its target to $84 from $110. Chevron had traded down 15% to $81.05 on Monday morning, after falling 1.9% to $95.32 on Friday, but this stock was down about 13.6% at $62.30 on Monday afternoon.

Occidental Petroleum Corp. (NYSE: OXY), which is now worth less than the value of the bad acquisition it made last year, was last seen down 33% at $17.25. Merrill Lynch downgraded Occidental to Neutral from Buy and slashed its price objective to $30 from $75. ConocoPhillips (NYSE: COP) was maintained as a Buy rating at Merrill Lynch, but the firm cut its price objective to $52 from $78. ConocoPhillips was trading down 25% at $34.00 on Monday afternoon.

While it had downgrades and lower price objectives on just about every company in the sector, it kept Buy ratings with lower targets on the following: Apache Corp. (NYSE: APA) to 25 from $34, Concho Resources Inc. (NYSE: CXO) to $71 from $127, Hess Corp. (NYSE: HES) to $60 from $77 and Pioneer Natural Resources Co. (NYSE: PXD) to $116 from $93. The performance was awful on Monday afternoon. Concho was down 19% at $46.83, Hess was down 35% at $32.09 and Pioneer was down 32% at $71.37.

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SunTrust Robinson Humphrey downgraded more than 25 in its oil exploration and production universe. The firm now sees an oil price collapse as a price war kicked off this weekend as Saudi Arabia responded to Russia after it refused to endorse new production cuts for the OPEC+ group and after it refused to extend the existing oil cuts that end in three weeks, along with continued oil demand destruction due to COVID-19. The firm spoke with oil executives over the weekend and now suggests the E&P players are likely in for a bleak period, if the price war and COVID-19 impact last more than a quarter. The list of downgrades is too large to write out, but these are the tickers: APA, CPE, CDEV, CHK, XEC, CLR, DVN, FANG, ESTE, ERF, EOG, XOG, HPR, MGY, MRO, MTDR, NOG, OXY, OVV, PE, PXD, RTLR, REI, ROSE, VNOM, WLL and WPX. Many of those stocks were down 20% to 30% in early trading. Here is how some of those stocks have performed on Monday:

• Apache Corp. (NYSE: APA) was down 15% at $20.70 on Friday’s sell-off and was indicated down another 30% or so at $14.20 on Monday morning, but by the afternoon its shares were down 45% at $11.35.
• Chesapeake Energy Corp. (NYSE: CHK) was down another 18% to less than $0.18 on more than 150 million shares as of Monday afternoon.
• Continental Resources Inc. (NYSE: CLR) was last seen down 45% at $8.11 on Monday afternoon.
• Marathon Oil Corp. (NYSE: MRO) was downgraded to Hold, and STRH cut its target to $7 from $18, with shares last seen down 44% at $3.80 on Monday afternoon.
• Whiting Petroleum Corp. (NYSE: WLL) was down 17% at $1.33 on Friday. While it previously saw a drop of 40% at $0.78, it was down about 28% at $0.955 on Monday afternoon.
• WPX Energy Inc. (NYSE: WPX) was down 42% at $3.76 on Monday afternoon, down from a 52-week high of $15.33.

Even the infrastructure side of the equation was being hammered on Monday as the fallout will have a widespread effect. That sector already had decoupled from the old notion that it was insulated from the effects of lower oil prices. Robert W. Baird downgraded Energy Transfer L.P. (NYSE: ET) to Neutral from Outperform and lowered its target price to $9 from $15. Energy Transfer units were last seen down 21% at $8.04.

Tellurian Inc. (NASDAQ: TELL) was downgraded to Neutral from Outperform at Robert W. Baird, and its target price was slashed to $2 from $5. Tellurian was last seen down over 23% at $0.93 on Monday.

Indications were awful on Monday elsewhere in the master limited partnership and MLP-like infrastructure leaders. Enterprise Products Partners L.P. (NYSE: EPD) closed down 5.3% at $22.42 on Friday and was indicated down 19% at $18.11 on Monday. Enterprise Products Partners would now have a 9.8% indicated dividend yield, if it can be maintained in the quarters ahead. Kinder Morgan Inc. (NYSE: KMI) was down almost 1.9% at $19.33 on Friday but it was trading down over 10% at $17.25 on Monday. Cheniere Energy Inc. (NYSE: LNG) was last seen down over 14% at $38.84, and it has the sole approved LNG export terminal of its kind.

International oil giants were pinched as well. BP PLC (NYSE: BP) American depositary shares were down 4.1% at $31.25 on Friday, but the drop on Monday was almost 19% to $25.50. Total S.A. (NYSE: TOT) fell by 2.8% to $42.31 on Friday, followed by a 16.5% drop to $35.32 late on Monday.

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