Shares in reservoir services company Core Laboratories (NYSE: CLB) fell by more than 4% this afternoon. The move comes down to a couple of factors. First, the price of oil continued its slide. It’s now hovering around $107 a barrel, having been above $122 a month ago.
While it’s important not to get too caught up in short-term movements in energy prices, the intensity of the move highlights that some speculative money had undoubtedly gone into energy commodities and that so-called “fast money” can quickly come out.
Second, investors are nervous that the recent hike in interest rates (Federal Reserve and market rates) will choke off economic growth and lead to lower demand for oil. Third, the concerns are exacerbated with a stock like Core Laboratories because, as my fellow fool.com contributor Eric Volkman writes, Core Labs recently announced a program to sell the company’s $60 million worth of equity. It dilutes existing shareholders’ claims on the company’s earnings and cash flow.
If the bearish fears come true, then this probably isn’t the right time to be raising equity, not least if it’s invested at the peak of the price of oil. That said, there’s no guarantee that prices are near the peak, and industry bodies, like the International Energy Forum believe that current oil investment is not enough to stop supply shortages and ultimately higher prices.
The debate over the direction of the price of oil will run its usual course. However, the bullish case could be strengthened over the medium term by the long-term threat from the transition to clean energy. It may well cause caution in spending among oil majors, ultimately leading to a long sustained period of higher prices and growing investment rather than the traditional boom and bust cycles. That could be a good thing for Core Labs. The question is, what happens over the long term?