Independent oil and gas stocks rewarded investors handsomely in the first quarter of 2019 as the Organization of Petroleum Exporting Countries (OPEC) kept supply tight and fears of a global economic slowdown eased on the back of optimism that a trade deal breakthrough between the United States and China was on the horizon.
Fast forward two months, and oversupply worries along with an escalation in U.S.-China trade tensions are causing the same stocks to fall severely out of favor with investors. If the latest iteration of tariff slapping between the world's two largest economic superpowers wasn't enough to pressure oil prices, U.S. government data released Wednesday that revealed a surprise surge in crude inventories was.
West Texas Intermediate crude for July delivery (F*CL.NYM) plunged 5.7% yesterday – its steepest single-day decline this year – sending the share prices of oil and gas producing companies into freefall amid its sell-off. "The recent stock builds coupled with fears of a global economic slowdown has the market in risk-off mode at the moment," Ryan Fitzmaurice, an energy strategist at Rabobank, told CNN Business.
Traders who want to position for further falls in the oil price should monitor these three industry players that broke below technical support in Thursday's trading session. Let's examine each issue more closely and run through some trading tactics.
Noble Energy, Inc. (NBL)
Noble Energy, Inc. (NBL) engages in the exploration and production of crude oil, natural gas and natural gas liquids, with operations in the United States, Israel and West Africa. The Houston-based company has net proven reserves of roughly 1.9 billion barrels of oil equivalent. Noble Energy posted a first quarter loss of 9 cents per share, missing analysts' expectations of 8 cents per share. This compares to earnings of 35 cents per share for the year-ago quarter. The oil and gas producer plans to make organic capital expenditures between $675 million and $750 million in the second quarter. As of May 24, 2019, Noble Energy stock has a market capitalization of $10.41 billion, pays a 1.78% dividend yield and is trading up 17.27% year to date (YTD).
Noble shares rallied above the downward sloping 200-day simple moving average (SMA) in mid-April but failed to hold above the popular indicator as oil prices began to retreat. In yesterday's trading session, the stock broke down below an uptrend line that dated back to the bear market low in late December. The move occurred on the heaviest volume in the past two weeks, adding conviction to the sell-off. Those who open a short sale should look to cover their position near the Dec. 26 low at $16.94. A stop-loss order could sit above either Thursday's high or a period of consolidation earlier this month at the $24.65 level.
Devon Energy Corporation (DVN)
Oklahoma City-based Devon Energy Corporation (DVN) explores for, develops and produces oil and natural gas in the United States and Canada. The $11.28 billion energy giant operates approximately 12,900 wells and has reserves totaling 1,927 million barrels of oil equivalent. Royal Bank of Canada downgraded Devon Energy stock to "sector perform" from "outperform" in March, citing downside risk to market expectations on planned asset sales. Devon Energy trades at a premium to its competitors, with a price-to-earnings ratio (P/E ratio) of 22.8 compared to the industry average multiple of 17.9. The company's shares offer a 1.12% dividend yield and have a YTD return of 20.90% as of May 24, 2019.
The Devon Energy share price recouped about 50% its steep 2018 fourth quarter loss over the first four months of this year. However, the good times abruptly ended Thursday, with the stock breaking convincingly below the support of a horizontal trendline connecting several reactionary swing points. Those who take the trade should set a take-profit order near the late December swing low. Protect trading capital by placing a stop order above yesterday's high at $28.71. Alternatively, allow for more wiggle room by setting a stop above the 50-day SMA.
Cimarex Energy Co. (XEC)
With a market cap of $6.39 billion, Cimarex Energy Co. (XEC) operates as an independent oil and gas exploration and production company, with assets primarily in Oklahoma, Texas and New Mexico. The company has total proved assets of 591.2 million barrels of oil equivalent and interests in 2,902 oil and gas wells. The companys first quarter earnings per share (EPS) came in at $1.20, missing analysts' estimates by 17 cents, or 12.4%. Cimarex attributes the underperformance to declining realized commodity prices. The oil and gas stock yields 1.17% and has returned just 4.56% on the year, underperforming the industry average and S&P 500 Index by 1.30% and 8.02%, respectively as of May 24, 2019.
Cimarex shares have traded flat to slightly lower since the start of February. The price has attempted to climb above the 50-day SMA on several occasions over that period but has failed to see follow-through buying each time. Sellers unloaded their positions Thursday, driving the stock down 6.58% and below an area of two-month consolidation/sideways drift. Despite the significant fall, the relative strength index (RSI) gives a reading above oversold territory that gives price plenty of room to continue its downward momentum before bargain hunters enter the market. Consider using a similar exit strategy to the stocks discussed above by banking profits on a capitulation to the December low. Cut losses if the price reverses and closes above the 50-day SMA.