Despite the atrocious news, these oil stocks are rallying today

What happened

Stocks of oil service companies rallied strongly today. At 3 p.m. EDT, NextTier Oilfield Solutions (NYSE: NEX) rose more than 40%, while its peers Patterson-UTI Energy (NASDAQ:PTEN) and ProPetro Holdings (NYSE: PUMP) increased by 25% and 12% respectively. These rallies came even though Patterson-UTI reported poor first quarter results with an even bleaker outlook for what lies ahead.

Instead of focusing on these negatives, investors are increasing energy stocks today due to a rise in oil prices. The June contract for WTI, the main benchmark price for U.S. oil, climbed more than 20% to around $17 a barrel on hopes that more producers will cut output and reduce the oil glut in the US. industry.

Image source: Getty Images.

So what

Patterson-UTI gave investors insight into the seriousness of the situation for US-focused onshore service companies. Its first-quarter revenue fell 37%, leading it to report a loss of $0.45 per share. It noted that it had 123 rigs in operation at the end of the quarter, which was down 30% year over year.

However, as bad as this quarter has been, he expects conditions to get worse, given the historic drop in oil prices this year. Patterson expects to exit the current quarter with just 70 rigs working for clients. Additionally, he noted that his customers are unlikely to start drilling more wells in the third quarter, suggesting the industry is going through more than a temporary “fracking vacancy.”

The pessimistic forecast is driven by significant cutbacks in spending and activity across the industry, as crude prices plunged $60 to start the year in negative territory earlier this week. Devon Energy (NYSE:DVN), for example, has already cut spending twice this year, cutting spending by 45% in total. The latest cuts in Devon will result in a postponement of activity in the Eagle Ford shales. This follows an earlier postponement of its STACK and Powder River Basin assets. As a result, it only works in the Permian Basin. apache (NASDAQ:APA), meanwhile, had previously reduced its rig count in that region to zero. This move, along with other cuts, will help preserve Apache’s balance sheet so it can stay afloat during this downturn.

Because drillers are dramatically reducing their expenses and activity levels, service providers like Patterson are taking steps to preserve their financial flexibility. It cuts its dividend by 50% and plans to make additional savings to shore up its balance sheet. NexTier recently took similar action, cutting capital spending by $100 million and idling part of its fracking fleet to bring operations in line with market conditions. ProPetro, meanwhile, cut the salaries of some of its executives this month as it struggles to combat the severe impact the oil market downturn is having on its operations and finances.

Investors, however, are completely ignoring this grim picture today. Instead, they focus on the fact that oil prices are rising and driving up oil inventories, even though some of the buying could be due to short blanket.

Now what

With crude oil trading at less than $20 a barrel, oil companies will likely continue to cut capital spending and delay the drilling of new wells. As a result, it could be some time before service companies see a rebound in activity. This could lead to significant financial stress for these companies, with the weaker ones possibly ending up joining many bankrupt drillers. For this reason, investors should avoid these oil stocks as it is unclear how many will survive this downturn.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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Felix J. Dixon