Why Oil Stocks Are Red-Hot Today

What happened

Oil prices rebounded again on Tuesday, marking crude’s best two-day rally in almost a month. At 2:45 p.m. EDT, the U.S. oil benchmark, WTI, was up 3.5% to more than $ 65.50 a barrel, while the global crude benchmark, Brent, soared past $ 71 a barrel. Fueling this rally was optimism that the brewing trade war between the U.S. and China won’t damage the global economy, as well as a report that Saudi Arabia wants to push crude closer to $ 80 a barrel.

This rebound in the oil market sent oil stocks soaring, with several rising double digits. Leading the charge were California Resources (NYSE:CRC), Sanchez Energy (NYSE:SN), Denbury Resources (NYSE:DNR), and Superior Energy Services (NYSE:SPN).

A silhouette of an oil pump in an oil field at sunset.

Image source: Getty Images.

So what

California Resources led the pack, rising more than 15% by the mid-afternoon. While the rebound in crude helped, the California-focused oil producer also benefited from a news-driven catalyst. That’s after the company announced last night that it agreed to acquire additional interests in the Elk Hills field from Chevron for $ 460 million in cash plus 2.85 million newly issued shares. The purchase will add 13,300 barrels of oil equivalent per day to the company’s production and generates about $ 100 million in annual cash flow given current oil prices. The company also expects to save $ 5 million in costs within the first six months, and another $ 15 million over the next 18 as a result of taking over full control of this field.

Meanwhile, today’s move in up in the price of crude was the sole catalyst driving the roughly 10% moves of Sanchez, Denbury, and Superior Energy Services. It was a welcome relief for Sanchez Energy, which has been under tremendous pressure this year after its stock has fallen nearly 30% since January, even with today’s move higher due to concerns about the company’s balance sheet. Because of that weak financial situation, the oil producer needs higher prices to provide it with the cash flow to pay down debt quicker. Denbury Resources shares that same concern, though its stock has fared much better, rising more than 40% this year. Denbury’s current priority is strengthening its balance sheet, which is easier to do with crude in the mid-$ 60s than it was when it was in the low $ 40s last year.

Superior Energy, on the other hand, moved higher today on the view that improving oil prices will fuel higher demand for the company’s services in the future. The oilfield service company noted earlier in the year that “an improved oil price environment…can lead to better than expected results and improving margins” in 2018, according to CEO David Dunlap. The market seems to have bought into this view today.

Now what

Investors enthusiastically sent oil prices higher today, but that could be gone tomorrow if something spooks the market, likely taking these oil stocks with it. While that’s a general theme across the oil market, this quartet of oil stocks is more susceptible to big swings because they need higher oil prices to support their weaker businesses. That’s why investors shouldn’t bother chasing after them since there are far better options out there to consider buying instead.

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