Trader Talk

Another heartbreaking day for investors in oil stocks

Stacked rigs are seen along with other idled oil drilling equipment in Dickinson, North Dakota, June 26, 2015.
Andrew Cullen | Reuters

Another heartbreaker for energy stock traders.

It had been a very promising week: for the first time since April, energy stocks were in a modest uptrend, though oil itself sat at the lows, with no sign of a bounce.

OK, the uptrend was only for about four days, but it was the first uptrend of ANY kind since April. Since then the Energy Select ETF, a basket of all the large energy names, has gone straight down almost every day, dropping about 20 percent in three months.

What happened today? Investors made the same mistake they made several times this year: they tried to buy oil stocks ahead of a recovery in oil.

It is, unfortunately, the wrong trade: oil leads oil stocks, not the other way around.

And so, when oil hit another new low at the open today, you could just about hear a giant "whoosh" of sell orders sweep the floor as investors once again threw in the towel on energy.

All the drillers and exploration & production names fell apart, again. Transocean, Chesapeake, and Southwestern down more than 4 to 6 percent.

Devon, Baker Hughes and Apache down about 3 percent.

Not surprisingly, there are more "capitulation" notes out. Oppenheimer's Fadel Gheit said in a note to clients this morning that the "new normal" in oil would be $65-$75 in the recovery. When will that weak recovery happen? Everyone has already given up on the "V" recovery, and most are now throwing in the towel on the "U" recovery.

Instead, Gheit said, there will be a "bathtub" recovery: lower for longer. Like, into 2016.

And, he added, expect layoffs. Lots of them. The energy industry added about 500,000 jobs in the last seven or eight years; a good chunk of them are in jeopardy.

Where does this leave energy stocks? The big guys can weather a downturn, the smaller guys cannot, so now it is a war of attrition.

Look what happened today: driller Hercules Offshore filed a prepackaged bankruptcy plan prior to the open, though the stock was already in freefall for two months.

The bulls point out that the oil majors have juicy dividend yields (4 to 6 percent) and they have all pledged not to cut the dividends.

Bears say, oh sure. They're safe for 2015, but if oil stays down here into 2016, forget about it. Remember the banks said they would never cut their dividends back in early 2008?

How'd that work out for everyone? Same thing here.

And remember, it's one thing for Conoco and ExxonMobil to say their dividend is safe, but the smaller exploration and production guys, and the drillers, don't have the cash flow to keep those dividends going. Ensco, Transocean, and Seadrill have already cut the dividend. Chesapeake eliminated the dividend completely.