News that Russia will not support the Organization of the Petroleum Exporting Countries on oil supply cuts sent energy stocks to an 11-year low.
Today, that drop will continue as the Middle East indicated that it will increase supply to hurt American and Russian producers. Already reeling from low demand and weak prices, the virus epidemic worldwide is slowing economic activity. Energy investors will have to suffer for longer.
Weak demand and excess supply will keep oil prices lower for longer. Plus, energy firms have no idea when the industry will improve. In a highly cyclical industry, the latest drop is another setback for investors. Exxon (NYSE:XOM) and BP plc (NYSE:BP) may weather the fall-out but Occidental Petroleum Corporation (NYSE:OXY) is out of favor because of its massive Anadarko Petroleum purchase.
OXY is a special, levered case whose prospects are troubling, at least for now. It announced $10.2 billion worth of divestitures. Its $15-billion asset sale target is achievable, only the timing of the activity is unlucky.
In the second half of 2019, OXY paid down $7 billion in debt. The $500 million cash flow may fall in light of the weaker markets.
Income investors need to wait it out. Dividend income from the big names like Exxon and BP will soften the paper losses. And as a cyclical sector, demand for energy will eventually return. Civilization beat past viral outbreaks. This time is no different. It just needs the coordination of countries to minimize the spread and to get the economy on the rebound.
Disclosure: the author owns BP shares.
