When oil prices fell at levels not seen in two decades, the harsh conditions did not hurt the major oil players’ stock. Exxon (NYSE:XOM) and BP (NYSE:BP) shares bottomed last month. Plus, markets keenly bought up debt offerings from these firms. The added liquidity lowers any worries of a financial crunch even if oil prices fall further.
At ~$18 a barrel, energy firms face plenty of headwinds ahead. The firms may continue producing oil and selling at a loss. The operating cash flow will keep capital and staff utilization at minimum levels. More importantly, oil companies may wait out the global demand slump.
The lockdown will eventually end. As some non-essential businesses resume, the economy, albeit weak, will give the demand for energy a lift. This will lead to a drawdown in U.S. oil inventories. It will also support the equilibrium in OPEC supply with world demand.
Weak oil producers and exploration firms will not survive. The bankruptcy should remove the excess supply in the oil market today.
Though the prolonged slump will lead to a rise in failed businesses, the strongly integrated firms should come out ahead.
Investors should continue holding a small position in energy stocks with a holding period of three to five years.
Disclosure: the author owns BP stock.
