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Penn West, Seadrill, Baytex: Not A Good Day To Be An Energy Stock

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There is never a dull day in the energy sector, as shares of oil E&P’s and oil service companies tend to make big moves one way or the other. In Monday’s case, shares of Baytex Energy Corp (USA) (NYSE:BTE), Penn West Petroleum Ltd (USA) (NYSE:PWE), EP Energy Corp (NYSE:EPE), and Seadrill Ltd (NYSE:SDRL), among others, are moving notably lower. Let’s take a closer look at the downside catalyst and see if the smart money disagrees with the market on any of them.

Oil Exploration

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Shares of Baytex Energy Corp (USA) (NYSE:BTE)Penn West Petroleum Ltd (USA) (NYSE:PWE)EP Energy Corp (NYSE:EPE), and Seadrill Ltd (NYSE:SDRL) are down because Brent is off by 2.8% and WTI is down by 2.2% in afternoon trading. Given the debt on their balance sheets, all four securities are high beta, so a sharp move in crude will likely mean an even sharper move in the stock prices of the four companies.

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All four companies’ fortunes will improve substantially if crude rallies to a high enough point, although given the current oversupply situation in the industry, investors are uncertain when crude will recover, with not expected in the near-term. At current prices, most high beta energy companies are not profitable and have finite timelines to wait for crude to recover. Some companies, such as Seadrill, can afford to wait longer for crude to recover than others, however.

Follow Penn West Petroleum Ltd. (NYSE:PWE)
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Crude prices have halved since August of last year because of weak macro economic factors and Saudi Arabia increasing its production by one million barrels a day. The combination has created a serious supply glut that has pushed inventories to record levels. Crude speculators are likely selling off crude futures today because they are concerned about near-term oversupply. The prospect of Saudi Arabia working with Russia to correct oversupply has also diminished after Russia began bombing various parties in Syria (of which Saudi Arabia likely supports).

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Still, there have been some recent green shoots, and crude can’t stay low forever. There are signs that non-OPEC production is decreasing and crude demand is increasing. The attractiveness of the four securities depends on the timing of the crude rebound. The faster crude rebounds, the better for the four companies.

On the next page, we’ll analyze hedge fund sentiment toward the four companies.

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