The historical drop in oil prices in the last week rivaled the one that followed the Gulf war in 1991. And as Saudi Arabia floods the oil market to weaken Russia and the United States, energy prices will weaken further. But investors cannot expect healthy firms like BP plc (NYSE:BP) and Exxon (NYSE:XOM) to sit still.
The vertically integrated firms will survive the sustained drop in energy prices. Conversely, in the natural gas space, companies having too much debt will operate in a smaller size. For example, Antero Resources (NYSE:AR) and Chesapeake Energy (NYSE:CHK) will probably restructure its debt, reverse-split its stock, and cut output. Ideally, firms like these exit the market and wind down the business.
Now, after shares fell by 50%, XOM and BP stock pay exceptionally high dividend levels. Cutting dividends is a possibility. Even better for shareholders is if the company uses the excess cash to buy back shares at depressed prices.
All they have to do is survive six to 18 months of harshly low energy prices. As the weak firms exit the market, output shrinks. OPEC+ will eventually cut supply to raise prices. From there, investors who bought energy stocks at the bottom will get rewarded.
The author owns BP stock.
