Insights

Why Occidental Petroleum, Range Resources, and Transocean All Plunged as Much as 10% Today

What happened
The shares of energy industry players Occidental Petroleum (NYSE: OXY), Range Resources (NYSE: RRC), and Transocean (NYSE: RIG) fell as much as 10.5%, 13.5%, and 12%, respectively on May 9. By roughly 1:30 p.m. ET each of the names here was still hovering close to its lows for the day.
So what
The S&P 500 index fell sharply today, with the market seemingly in a prolonged downdraft. That clearly had an impact on investor sentiment. But, for Occidental, Range, and Transocean, the bigger driver was likely the steep declines in the price of oil and natural gas. By roughly 1:30 p.m. ET these two vital energy sources were lower in the mid- to high-single digits. That’s a pretty notable move even for these typically volatile commodities. For Occidental and Range the oil and natural gas declines are tied directly to their top and bottom lines, given that Occidental is a large oil driller and Range is a large natural gas producer.
Image source: Getty Images.

Occidental, notably, has been working back from an ill-timed acquisition that left its balance sheet heavily leveraged. Rising energy prices as the world started to move past coronavirus-related lockdowns, and now geopolitical tensions, have helped it to deal with lingering issues on that front. Still, the company’s debt-to-equity ratio remains multiple times the levels of companies like Chevron and ExxonMobil (the shares of these two companies were down in the mid-single digits today). In other words, falling energy prices are likely to have a more material, and negative, impact on Occidental’s business than some of the more dominant, and financially stable, industry players.
Range Resources, with a modest $7 billion market cap, is an industry small fry. For reference, Occidental’s market cap is around $50 billion and Chevron’s is around $300 billion. Smaller companies are often more volatile. That said, Range’s debt-to-equity ratio, at around 1.6 times, is even higher than that of Occidental. So falling natural gas prices are having the outsize impact you would expect on a small, leveraged energy driller. 
Transocean is one step removed from energy prices, since it provides services to drillers, largely of the offshore variety. Energy services stocks tend to be fairly volatile in general, even relative to drillers, so sharp moves aren’t exactly a surprise. However, the general logic today is likely that falling energy prices will lead to less drilling and, thus, less business for companies like Transocean. 
Now what
The energy sector is notoriously volatile. Right now, it seems the broader market is, too. Given the large run up in oil prices, and the prices of energy stocks, since the depths of the pandemic recession, investors should probably be extra cautious about the names they own here. Leveraged names, smaller companies, and those already prone to steep and dramatic price moves are probably best left to more aggressive types. They are, effectively, doing exactly what you would expect in the face of weak energy prices. If you want to own energy stocks today, sticking to financially strong industry giants like Chevron and Exxon will make it easier to sleep at night.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Transocean. The Motley Fool has a disclosure policy. –

What happened

The shares of energy industry players Occidental Petroleum (NYSE: OXY), Range Resources (NYSE: RRC), and Transocean (NYSE: RIG) fell as much as 10.5%, 13.5%, and 12%, respectively on May 9. By roughly 1:30 p.m. ET each of the names here was still hovering close to its lows for the day.

So what

The S&P 500 index fell sharply today, with the market seemingly in a prolonged downdraft. That clearly had an impact on investor sentiment. But, for Occidental, Range, and Transocean, the bigger driver was likely the steep declines in the price of oil and natural gas. By roughly 1:30 p.m. ET these two vital energy sources were lower in the mid- to high-single digits. That’s a pretty notable move even for these typically volatile commodities. For Occidental and Range the oil and natural gas declines are tied directly to their top and bottom lines, given that Occidental is a large oil driller and Range is a large natural gas producer.

Image source: Getty Images.

Occidental, notably, has been working back from an ill-timed acquisition that left its balance sheet heavily leveraged. Rising energy prices as the world started to move past coronavirus-related lockdowns, and now geopolitical tensions, have helped it to deal with lingering issues on that front. Still, the company’s debt-to-equity ratio remains multiple times the levels of companies like Chevron and ExxonMobil (the shares of these two companies were down in the mid-single digits today). In other words, falling energy prices are likely to have a more material, and negative, impact on Occidental’s business than some of the more dominant, and financially stable, industry players.

Range Resources, with a modest $7 billion market cap, is an industry small fry. For reference, Occidental’s market cap is around $50 billion and Chevron’s is around $300 billion. Smaller companies are often more volatile. That said, Range’s debt-to-equity ratio, at around 1.6 times, is even higher than that of Occidental. So falling natural gas prices are having the outsize impact you would expect on a small, leveraged energy driller. 

Transocean is one step removed from energy prices, since it provides services to drillers, largely of the offshore variety. Energy services stocks tend to be fairly volatile in general, even relative to drillers, so sharp moves aren’t exactly a surprise. However, the general logic today is likely that falling energy prices will lead to less drilling and, thus, less business for companies like Transocean. 

Now what

The energy sector is notoriously volatile. Right now, it seems the broader market is, too. Given the large run up in oil prices, and the prices of energy stocks, since the depths of the pandemic recession, investors should probably be extra cautious about the names they own here. Leveraged names, smaller companies, and those already prone to steep and dramatic price moves are probably best left to more aggressive types. They are, effectively, doing exactly what you would expect in the face of weak energy prices. If you want to own energy stocks today, sticking to financially strong industry giants like Chevron and Exxon will make it easier to sleep at night.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Transocean. The Motley Fool has a disclosure policy.

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