Bankruptcy Wave Could Hit Oil Services Stocks

President Trump spoke with Saudi Arabia and Russia about the crude oil price war and believes that they will end their dispute “in a few days.” That seems overly optimistic because there’s a good chance that those nations intentionally crashed world oil markets to undermine U.S. energy production for their personal gain. And even an agreement might not move crude oil prices at this point because worldwide demand is dropping like a rock due to the coronavirus pandemic.

Meanwhile, VanEck has just announced the reverse split of the VanEck Vectors Oil Services ETF (OIH)effective on April 15. This group was mired in a brutal downtrend well before crude oil took the plunge, with high debt levels and poor management undermining profits and revenues. It may already be too late to save well-known sector names from bankruptcy, even if Trump nudges the energy market into a new uptrend.

The fund came public in the low $30s in 2001 and sold off to $13.93 a few months later. An uptrend into July 2008 posted an all-time high at $76.25, at the same time that crude lifted into the $140s. The subsequent decline held eight points above the prior low after the October crash, yielding a recovery wave that completed a lower high in 2014. Aggressive sellers then took control, generating steady downside that completed a massive double top breakdown in December 2018.

The sell-off posted lower lows through 2019 and accelerated at the start of 2020, hitting an all-time low at $3.30 on March 18. It has barely budged in reaction to Trump’s statement, highlighting skepticism and the likelihood that these companies will not return to profitability any time soon. The upcoming reverse split will lift the fund back into the double digits, but that won’t change the abysmal long-term price pattern.

Schlumberger Limited (SLB) stock posted an all-time low at $6.50 after the October 1987 crash and turned higher, entering an uptrend that completed a breakout to new highs in 1995. The advance posted impressive gains into the 1997 top at $47.22 and gave way to a five-year trading rangefollowed by a 2002 breakdown that found support at a six-year low in the mid-teens. The stock performed well during the mid-decade bull market, reaching $115 in October 2007, and carved a proportional decline during the 2008 economic collapse.

The subsequent uptick completed a round trip into the prior high in 2014 and added less than four points before failing the breakout. Persistent selling pressure reached the 2009 low in December 2018, ahead of a February 2020 breakdown that posted a 30-year low at $11.87 on March 19. Ominously, the stock has failed two bullish crossovers on the monthly stochastic oscillator since January 2019, setting the stage for greater downside.

Halliburton Company (HAL) entered a strong uptrend in 1992, posting impressive gains into the 1997 high at $31.63. It gave up all gains after breaking down from a double top in 2001, finding support within four cents of the 1986 low in January 2002. The subsequent advance posted historic upside into the summer of 2008, topping out at $55.38, ahead of a bear market decline that relinquished three-quarters of the stock’s value into the December 2008 low.

A 2014 rally above the 2008 high added less than 20 points before turning tail in a failed breakout. The selling wave found support in the mid-$20s in 2016, establishing a trading floor that broke down in December 2018. The stock has been crushed since that time, bouncing five cents below the 2002 low on March 18. In turn, this marks the first phase of a test at 34-year-old horizontal support that, if broken, is likely to signal bankruptcy.

The Bottom Line

Well-known oil services stocks have hit multi-decade lows in reaction to the crude oil crash and may not survive the downturn.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.