A giant American oil company just did the unthinkable…
If you’ve been reading the Dispatch, you know the world oil market is in crisis. The price of oil has plunged 71% since June 2014.
The world simply has too much oil. Global oil production hit a record high last year. Thanks to technologies like “fracking,” oil companies can now access billions of barrels of oil that used to be trapped in shale rock formations.
The Wall Street Journal reported last week that the global economy is oversupplied by about 1.5 million barrels a day.
• Giant oil companies are struggling to make money…
Last year, British oil giant BP (BP) recorded its worst annual loss since at least 1985. Last quarter, Exxon Mobil (XOM) and Chevron (CVX) both earned their lowest profits since 2002.
Royal Dutch Shell (RDS.A), Europe’s largest oil company, made just $3.8 billion in 2015… after making $19 billion the year before. Total SA (TOT), Europe’s second largest oil company, expects to report a huge drop in profits for 2015.
These five companies are known as the “supermajors.” On average, their stock prices have plunged 30% since June 2014.
• The oil industry is in “survival mode”…
Oil companies have laid off more than 250,000 workers since the downturn began. Worldwide, they’ve cut spending by more than $100 billion in the last year alone.
Oil companies have sold assets… slashed exploration budgets… and abandoned billion-dollar projects.
• But until recently, big oil companies have not cut dividend payments…
Last week, we explained that large oil companies pay some of the steadiest dividend streams on the planet. For example, Shell hasn’t cut its dividend since World War II. Exxon and Chevron have both increased their annual dividends for at least the past 25 years.
These giant oil companies have been paying regular dividends for decades, even through the 2001 dot-com crash and the 2008 financial crisis.
Many investors view these dividend streams as sacred… as a foundational aspect of the family holdings, like grandma’s ring or the family farm.
• ConocoPhillips (COP) cut its dividend by 66% last week…
Conoco is the third largest U.S. oil company. It announced horrible results last week. Fourth-quarter sales plummeted 43% from the prior year, and it booked a net loss of $3.5 billion.
To cover its huge losses, Conoco cut spending across the board… including cutting its quarterly dividend from $0.74 to $0.25. It is the largest U.S. oil producer to cut its dividend during this oil crisis.
Since cutting its dividend, Conoco has plunged 15%. It has fallen 62% since June 2014.
• The dividend cut blindsided Conoco shareholders…
Investor’s Business Daily reported last Thursday (emphasis our own).
ConocoPhillips’ budget cuts weren’t enough to stave off its first dividend reduction since 1991 and comes just two months after the company said the “dividend remains the highest priority use of our cash.”
• Conoco’s dividend cut suggests oil stocks are getting closer to a bottom…
The oil industry is cyclical. It goes through big booms and busts. Eventually we’ll get an amazing opportunity to buy world-class oil companies at absurdly cheap prices.
But not yet. We expect the oil crisis to force more large oil companies to cut their dividends. This will likely trigger another leg down in oil stocks. Until then, we recommend staying away.
• Changing gears, retail stocks are tanking due to bad holiday sales…
On Thursday, clothing company Ralph Lauren (RL) plummeted 22% on bad financial results. Ralph Lauren’s sales fell 4.3% last quarter, and its profits fell 39%. It was the worst day ever for Ralph Lauren stock.
Retailer Kohl’s (KSS) also plunged 19% on Thursday, due to lower-than-expected sales. It was the stock’s biggest one-day drop since 2000.
Neither company expects things to turn around this year. On Thursday, Ralph Lauren said this year’s sales will likely be even worse. Kohl’s expects this year’s profits to be 12% lower than it had planned.
• Shares of other major retailers tanked on the news…
Macy’s (M), J C Penney (JCP), and Target (TGT) all fell more than 3% on Thursday.
The SPDR S&P Retail ETF (XRT), which tracks 100 U.S. retailers, ended last week down 4.6%. It’s down 9.5% on the year.
• E.B. Tucker, editor of The Casey Report, predicted bad holiday sales for retailers…
Here’s what E.B. said in the Dispatch back in November:
After the financial crisis, people bought new cars, new homes, and made more trips to the mall. Life was good. Today, people are spending less and less on things they don’t really need. That’s what happens when times get tight.
Consumers are cutting back spending on “want” items, and that’s hitting certain retail stocks hard.
Fossil (FOSL) is one example. It sells watches, wallets, and all sorts of things people can do without. Two years ago, its stock traded for nearly $130 per share. It’s now a $30 stock.
Sporting goods store Hibbett Sports (HIBB) is another example. Like Fossil, Hibbett sells things the average person can do without. Less than two years ago, the company’s stock topped $67. It now trades for less than $30.
E.B. also warned that problems in the retail sector would spread.
Consumers cut back spending on mostly unnecessary items first. Pretty soon, Americans are going to stop buying steak and start buying hamburger. When the economy sours, every penny counts.
Before you know it, people are pawning off all the expensive junk they bought with cheap credit since the last financial crisis. That’s one way markets unwind seven years of excess borrowing and spending.
Many investors will end up finding coal in their stocking before this holiday season is over.
Chart of the Day
The selloff in retail stocks isn’t a surprise for Dispatch readers…
On November 16, we showed the SPDR S&P Retail ETF (XRT), which tracks 100 U.S. retail stocks, had broken its long-term uptrend line. You can think of an uptrend line as a “line in the sand.” As long as a stock stays above it, the uptrend is intact. But when a stock drops below its uptrend line, it’s often a signal that the trend is turning from “up” to “down.”
Today’s chart is an updated version of the chart we showed you in November. As you can see, XRT has continued to fall since breaking its uptrend line earlier this year.
Retail stocks are now in a downtrend. We recommend avoiding them.
Delray Beach, Florida
February 08, 2016
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