In early April, prominent Wall St analysts predicted that oil prices could go beyond $100 per barrel as OPEC+ cut output while demand was supposed to surge due to China’s reopening. However, this prediction has failed to come to fruition, as oil prices have barely budged beyond $70 a barrel, down from over $80 in April. This was the cause of a few key reasons:
- The likelihood of a recession worldwide has made investors pessimistic about oil prices.
- China’s reopening has proved to be disappointing.
- It has a significant amount of oil being supplied by Russia.
- The U.S. is moving to increase its production of oil.
Earlier this year, even Democrat Joe Biden moved to approve the new Alaskan drilling project. Overall, these developments will likely keep oil prices down and, as a result, keep the gains that many in the oil industry experienced.
ConocoPhillips (COP)
Headquartered in Houston, Texas, ConocoPhillips (NYSE:COP) is a multinational corporation engaging in oil and natural gas exploration and production. Due to the abnormally high oil prices in 2022, its net income was over $18.6 billion. However, as oil prices fell, its stock fell over 10% YTD, underperforming its peers like Canadian Natural Resources (NYSE:CNQ) and Hess Corporation (NYSE:HES).
About 30% of its business comes from the sale of natural gas, which has been in a bear market for the past 10 years. As costs for natural gas are declining, production is still steadily rising, and even more have been added to reserves, making prices unlikely to recover soon. All in all, with oil prices still down, it’s unlikely that its earnings can recover.
Apart from short-term macroeconomic issues, the company faces major ESG risks in the long term. At the same time, most of its competitors are diversifying into renewables and preparing themselves for the future. ConocoPhillips has yet to do so, making it more vulnerable to government regulation and the eventual shift in demand away from hydrocarbons.
Overall, the company is facing macro headwinds in the short term while failing to hedge against ESG risks for the long term.
EOG Resources (EOG)
EOG Resources (NYSE:EOG) is a U.S.-based oil and gas producer with a small number of operations in Trinidad. Its stock has been beaten down by falling oil prices, declining over 12% YTD.
As a result of declining natural gas prices, Goldman Sachs recently downgraded its stock to neutral. Natural gas production remains high in the United States, and the mild winter further bolsters U.S.’s natural gas reserve. Over 49% of EOG’s production is natural gas, which has been increasing over the past few years, naturally occurring as older shale wells produce more natural gas than oil. Furthermore, EOG has been facing increased inflation in drilling costs, as Capex spending has increased while oil production has decreased. As a result of these developments, EOG’s dividends have decreased 50% YoY, leading to further negative sentiment.
Overall, EOG resources are facing a tough macro environment and have problems in their operation. Investors are better off waiting out this period or choosing another E&P company with stronger fundamentals.
APA Corporation (APA)
APA Corporation (NASDAQ:APA) is an oil and gas producer headquartered in the U.S. It operates in the Permian Basin (Texas), Egypt, The North Sea, and Suriname. Compared to its competitors, it has been one of the worst-performing oil and gas companies this year – down 24.9% –largely due to falling oil and gas prices, which have failed to rebound.
A large part of APA’s valuation comes from its developments in Suriname, where it has the potential to be very profitable due to financial support from the government. However, there have not been any discoveries that are deemed commercially viable. Rather, more cash will be burned in the process, with exploration costs already more than doubling from 2021 to 2022.
Right now, there is no way of knowing if its explorations will be successful, which makes the stock risky as its valuation is tied to this development. Furthermore, lots of cash will be spent at a time when low oil prices have already significantly reduced earnings.
Overall, with the company facing macro headwinds, it’s not a good time for investors to be betting on new developments.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
