Sell These Energy Stocks Before You Get Burned

The ongoing oil and gas price plunge has destroyed earnings, reduced cash flows and, for some companies, winding up in bankruptcy court has become the only option.

Stressed E&P Companies See More Pain Ahead

While all crude-focused stocks stand to lose from falling commodity prices, companies in the E&P sector are the worst placed, as they are able to extract less value for their products.

Importantly, as the pricing environment is likely to remain soft for the first half of 2016, the primary business of the crude oil E&P companies will remain under pressure. So, it will be prudent decision to get rid of some bottom-ranked stocks in this space if you are holding them. Otherwise, you should stay away from these stocks as they may witness downside in the near term.

In particular, we suggest avoiding exposure to mid- and small-cap E&P producers like WPX Energy Inc. (WPX - Analyst Report), Synergy Resources Corp. (SYRG - Snapshot Report) and Whiting Petroleum Corp. (WLL - Snapshot Report).

Offshore Drillers: Tough Finding Work

In 2015, offshore drillers struggled to get by, and more of the same is expected in 2016.

With majors like Transocean Ltd. (RIG - Analyst Report) suspending dividend and companies including Vantage Drilling Co. and Paragon Offshore plc delisting from major exchanges, there is enough evidence that offshore drillers are not out of the woods yet and are still facing a bleak industry outlook.

As crude prices hover around 7-year lows, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers as offshore exploration for new oil and gas projects has almost come to a standstill.

Secondly, with large, multinational energy firms looking to rein in their skyrocketing capital expenses, the offshore drilling space is witnessing intense competition, as multiple firms chase a single contract. This excess capacity, in turn, has led to significantly lower utilization/dayrates.

Companies like Pacific Drilling S.A. (PACD - Snapshot Report) and North Atlantic Drilling Ltd. (NADL - Snapshot Report) look to be in most trouble. Eating through backlogs without replacing them with new business, cash flow for these operators are likely to dry up further.

Don't Catch a Falling Knife – Sell Natural Gas Companies

Looking ahead, EIA expects average total natural gas production to rise by 6.3% in 2015 and 1.9% in 2016. But a projected decline in residential and commercial consumption would mean that demand won't be enough to absorb the increased levels of output.This will surely weigh on the commodity’s prices, translating into limited upside for companies associated with natural gas and related support plays.

According to the U.S. Energy Department’s weekly release, stockpiles held in underground storage in the lower 48 states reached an all-time high of 4.009 Tcf for the week ended Nov 20, 2015. Now at their lowest levels since 1999 and with expectations of continuing production growth amid warmer-than-normal winter temperatures, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumpster in 2016.

Consequently, natural gas-weighted exploration and production companies like Range Resources Corp. (RRC - Analyst Report) and Southwestern Energy Co. (SWN - Analyst Report) are in for a tough time. Gas-focused partnerships like Williams Partners L.P. (WPZ - Snapshot Report) and ONEOK Partners L.P. (OKS - Analyst Report) tend to suffer too, from falling sales for their natural gas liquids (NGL) processing. Natural gas exporter Cheniere Energy Inc. (LNG - Snapshot Report) is also feeling the pressure.