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Friday, February 5, 2016
Oil prices just spiked higher...
On Wednesday, the price of crude oil rose $3 per barrel, or 10%. It's rare to see a move like that in oil prices.
And some market prognosticators – including investment bank Goldman Sachs – are speculating that now is the time to buy these companies on the cheap.
Do yourself a favor: Ignore them. Here's why...
This week, ratings agency Standard & Poor's downgraded several U.S. oil and gas exploration and production companies. And it wasn't small companies, either – oil major Chevron (CVX) was among the noteworthy names that were downgraded...
This news didn't come as a complete surprise, though. Two weeks ago, ratings agency Moody's put 120 energy companies – including Royal Dutch Shell (RDS), Total (TOT), and BP (BP) – on review for a potential downgrade.
Right now, oil inventories are up and oil stocks are down. As long as that trend remains in place, it isn't time to buy.
In the October issue of the Stansberry Resource Report, my colleague Matt Badiali and I profiled the financial activity of major oil companies ExxonMobil (XOM), Chevron, Royal Dutch Shell, and BP. We showed our subscribers how these companies are cutting expenditures across the board, raising debt, and selling assets. They're doing this to make it through this period of lower energy prices... and to maintain their dividends.
For example, on Tuesday, BP announced it would cut another 7,000 jobs. The cuts are necessary – BP lost $6.5 billion in 2015. (It earned $3.5 billion in 2014. That's a $10 billion swing in the wrong direction.)
Exxon still posted a profit last year, but it was nearly $4 billion less than the company made in 2014. And $60 billion of its fourth-quarter revenue was $27 billion less than the same quarter a year earlier. So Exxon is cutting its capital expenditures by 25% (about $8 billion) and ending its share-buyback program.
Royal Dutch Shell is cutting 10,000 jobs and lowering its capital expenditures more than $25 billion below its peak in 2013.
The majors are doing what they believe they must do to get by in this environment.
But there's only so much these companies can cut before the ratings agencies come calling. This is a "catch-22." They need to cut expenses to appease the agencies, but they also need to continue to invest in their businesses. The ratings agencies downgraded these companies because they believe the cuts have reduced oil firms' ability to service their debt.
The main issue here is that despite this week's spike higher, crude oil prices are still stuck in a downtrend. Oil prices perked up a bit in late January. But they have yet to hold an uptrend. Until they do, we need to avoid these stocks right now.
Editor's note: In the February issue of the Stansberry Resource Report – out this past Wednesday – Brian and Matt Badiali put together a list of six high-quality stocks with incredible upside potential when the resource market turns higher. You can access these names with a risk-free trial subscription to the Stansberry Resource Report. Learn more here.
On Wednesday, Matt Badiali told Growth Stock Wire readers about an opportunity in another commodity today. "We could be in for a long, cold February and March," he writes. See which sector he recommends speculating on here.
"While we can't know when oil prices will head higher, lower production would be a good sign that we are near the bottom in oil prices," Matt wrote last month. Get the full story here.