What happened
Stocks cratered when the market opened this morning, with most major indexes having declined by more than 10% by 10:30 a.m. EDT on Monday. That sell-off carried over into the oil market, with the U.S. oil benchmark, WTI, falling more than 7%, crossing below the $30-a-barrel threshold.
That market wash-out sent most stocks tumbling on the day, with several energy stocks plunging more than 10%. Among the notable names were Kinder Morgan (KMI -0.26%), TechnipFMC (FTI -0.41%), Clean Energy Fuels (CLNE -0.76%), Oasis Petroleum (OAS), and ONEOK (OKE -0.41%).
Image source: Getty Images.
So what
Crude oil prices continue to fall amid dual shocks to both demand and supply. Not only has the COVID-19 outbreak affected worldwide travel, but the collapse of OPEC's market support agreement also has several nations pledging to flood the market with oil. Because of that, analysts believe that oil could have much further to fall.
This unprecedented decline in energy demand as the global economy effectively shuts down to combat the COVID-19 outbreak will hit each of these companies. Clean Energy Fuels, for example, has no direct exposure to oil since it sells natural gas via its refueling stations. However, with demand for fuel cratering, the volumes sold at Clean Energy's stations will fall, which will affect its profitability.
The slump in oil prices also has investors growing deeply concerned that the energy industry will see a massive wave of bankruptcies in the coming months. Oasis Petroleum is one of the many that face a tough road ahead, which is why its stock plunged by more than 50% today. The driller needed oil to average $50 a barrel this year so it could break even. However, with crude well below that level, it will likely need to slash spending so that it doesn't borrow more money to finance its operations. It had been using the free cash flow it produced at higher oil prices to repay debt and can't afford for its leverage to go in the opposite direction, given its weak credit profile. While it doesn't have any debt maturing this year, it has a small maturity next year and an even larger one to address in 2022.
Several drillers are slashing spending to stay afloat, and it's having an immediate impact on pipeline companies. ONEOK already reduced its 2020 spending plan because customers won't need some of its new expansion projects as soon as initially expected. There's also some worry that customers shipping oil, natural gas, and refined products on pipeline systems operated by companies like Kinder Morgan and ONEOK won't be able to pay what they owe. If that happens, it would hurt their cash flow.
Meanwhile, oil-field service and equipment company TechnipFMC will likely have some projects and equipment orders deferred or canceled because its customers need to cut spending to stay afloat during the industry's current rough patch. Further, it will have a tough time booking new orders during this period and will likely have to cut its prices when market conditions finally stabilize. Those issues could have a substantial impact on its profitability in the coming quarters.
Now what
The global economy appears to be grinding to a halt as governments limit travel to slow the spread of the COVID-19 outbreak. It's unclear how much of an impact this will have on oil demand at a time when several nations are opening the floodgates of supply. This uncertainly is weighing heavily on the energy sector and likely will continue doing so until there's a bit more clarity on when conditions might improve.
