Big Oil is shrinking.
ExxonMobil, the largest public energy company in the world, has seen its market cap plunge by more than $50 billion. Energy titans like Chevron and ConocoPhillips have experienced even sharper declines on a percentage basis.
These companies are being slammed by crude oil falling below $50 a barrel. Drilling projects that made lots of financial sense at $100 a barrel no longer look smart.
America’s 10 largest oil and natural gas companies have lost more than $200 billion combined since oil peaked in June, according to a CNNMoney analysis of FactSet data.
To combat depressed prices, oil companies are hitting the brakes on spending and laying off workers.
Investors are saying “enough.” They are dumping their energy stocks as the outlook for profits and dividends has diminished significantly.
No one expected this: All of the blame goes to the unexpected meltdown in oil. Between 2012 and 2014, oil rarely left its comfort zone of $90 to $110 a barrel. Falling below $50 was almost unthinkable. Now some believe crude could drop as low as $30.
“No one really saw this coming. The suddenness and length of this pullback has been very surprising,” said Brian Youngberg, an analyst who covers energy stocks at Edward Jones.
It’s forced Wall Street analysts like Youngberg to repeatedly slash their estimates of future profits for the industry. Those estimates are closely watched by investors as earnings are the engine behind future stock prices.
Profit outlook darkens: Estimates on S&P 500 energy earnings hit record highs in early October. At that point, oil was still above $85 a barrel.
Since then, forecasts have tanked. In the 12 weeks through December 25, the forward earnings of the sector plunged by 30% to $90 billion, according to Yardeni Research.
“There’s no question that earnings per share and cash flow will be under great pressure in 2015,” said Youngberg.
Six months ago energy earnings were expected to increase slightly in 2015. Now operating earnings per share are expected to plunge about 28%, according to S&P Capital IQ. It’s the only sector out of 10 in the S&P 500 forecasted to post a decline this year.
“People forgot about just how volatile oil prices can be,” said Stewart Glickman, director of equity research for energy and materials at Capital IQ.
Buying opportunity? It’s easy to see how energy stocks could tumble further if oil continues to sink. But the meltdown may have created an opening for patient bargain hunters.
“If you’re really focused on that long-term horizon of five to 10 years, we think investors will look back and see this was a great buying opportunity,” said Youngberg.
He said investors need to focus on companies that pay a decent dividend and have balance sheets healthy enough to weather the storm.
“The key is you have to be patient in the near term. Expect the potential of further downside,” Youngberg said.