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U.S. energy stocks crashed Monday after the one-two punch of a brewing price war among major oil-producing countries triggering a deep plunge for U.S. equities already battered by fears related to the novel coronavirus outbreak.
The S&P 500 index’s SPX, -7.55% energy sector index has fallen nearly 17% Monday, on pace for its lowest close since September 2004 and its largest one-day percentage decrease on record, based on available data going back to 1994.
The energy sector index SP500.10, -19.33% has lost about a quarter of its value in the past three days, the worst three-day stretch on record.
Related: Dow tumbles more than 1,300 points as oil price plunge and coronavirus fears rock stock market
Several investment banks unleashed price-target and share-rating cuts for energy stocks, with SunTrust taking the “unprecedented” step of downgrading its energy-related stocks under coverage to sell or hold. And one U.S. shale producer was the first of the many that Wall Street expects will have to announce cost-cutting measures to face the downturn.
Saudi Arabia and Russia are enmeshed in price wars as Russia late Friday balked at a plan that called for additional oil-production cuts. Saudi Arabia over the weekend lowered prices on its crude and reportedly is ready to increase production.
That’s an “apparent decision to desist with a policy of rational guardianship and, instead, embrace a Darwinian market-share grab by burning the village down,” analysts at Simmons said in a note.
See also:Oil down 20%, set for largest 1-day plunge since 1991 Gulf War on fears of global price war
Worst-hit stocks on Monday included shares of Diamondback Energy Inc. FANG, -44.85%, Apache Corp. APA, -50.45%, and Marathon Oil Corp. MRO, -49.70%, with declines that topped 40%.
Diamondback announced spending cuts earlier on Monday including plans to drop rigs over the next few months. In the next two to three weeks, other U.S. exploration and production companies are likely to announce “plans to decisively cut activity,” analysts at Stifel said in a note.
There will be likely a “swift response from the E&Ps as no CEO can reasonably walk into conference season (beginning mid-March) with a capital plan based on $50-55/bbl oil” the analysts said.
Blue-chip Exxon Mobil Corp. XOM, -11.92% and Chevron Corp. CVX, -15.47% shares fared better, as did shares of refiners Valero Energy Corp. VLO, -7.03% and Phillips 66. PSX, -9.13%
While refiners would benefit from cheaper oil prices, their margins are likely to suffer as well — unlike previous bouts of lower oil prices, crude moved lower “due to demand destruction as opposed to crude oversupply, making for a tougher backdrop for product margins to improve,” analysts at Goldman Sachs said in a note Monday.
Amid the carnage, the Goldman Sachs analysts said they “still see a rich environment for stock-picking and alpha generation,” singling out Chevron over Exxon, on Chevron’s stronger balance sheet; Canadian oil-sands producer Suncor Energy Inc. SU, -19.34%, which they see as better able to weather the oil prices downturn, and refiners Valero as well as Marathon Petroleum Corp. MPC, -11.45% and Phillips 66 as the companies with “significant” operations on coastal areas and thus ready to take advantage of crude oversupply.
On Monday, Cabot Oil & Gas Corp. COG, +1.55% was the rare spot of green among energy companies in the S&P. Analysts at Tudor Pickering Holt kept their buy rating on Cabot shares, their only buy-rated U.S. natural-gas producer. There’s still “further room to run” for the shares, trading at about $16 but worth up to $24, they said.
“Worth adding to at these levels, as we believe the equity will find strong foundational support at current prices while potentially benefiting over the coming months from capital flows if crude prices remain weak,” the Tudor Pickering Holt analysts said.
Analysts at SunTrust took another tack, saying that given the current market — price wars and continued oil demand destruction due to COVID-19, “we have taken the unprecedented steps of bringing our full coverage group to hold or sell even after the recent selloff that puts many of our names already at multi-year lows.”
SunTrust’s ratings changes to sell included ratings on Chesapeake Energy Corp. CHK, -21.37% and Occidental Petroleum Corp. OXY, -39.12%. “Hold” ratings from buy included those on Devon Energy Corp. DVN, -39.57% and Continental Resources Inc. CLR, -47.00%
“We spoke to several executives over the weekend who suggested all US E&Ps could be in for a bleak period if the price war and (novel coronavirus) impact last more than a quarter. While there is a chance both could somehow turn around in the coming months, we see little chance of anything materially improving for at least 2-4 months,” they said.
Morgan Stanley Chief Global Economist Chetan Ahya said in a note Monday that the virus-related economic disruptions are likely to cut global GDP growth to 2.3% in the first half of 2020, the weakest since the global financial crisis, before recovering later in the year to average 3.1% in the second half.
The outbreak has already prompted policy responses across the globe, and analysts expect more easing in the coming months, and risks for more benign views on a downturn include whether the outbreak is more widespread and lasts beyond April/May.
