Fossil fuel explorer Cairn Energy (LSE: CNE) has steadily fallen out of favour with share pickers in recent weeks — the stock has shed 17% of its value since striking three-year peaks around 243p per share in January.
Cairn Energy has tracked lower as hopes of the oil market returning to balance have shrunk. While Brent may have remained stable above the $50 per barrel marker since the start of the year — indeed, the black liquid cost just touched two-month peaks above $56 — data showing workers in the US shale sector stetadily getting back to work has still weighed on the oil sector.
Latest Baker Hughes numbers on Friday showed the US rig count rising for the 13th week in a row. A total of 683 working units now represents the highest since the spring of 2015, and threatens to keep Stateside inventories close to bursting point.
Meanwhile, the EIA said this week that it expects US output to rise by 124,000 barrels per day in May as producers become more economically comfortable operating at current crude prices. If correct, this would represent the biggest monthly jump for two years.
Too much risk
With output also booming from other nations like Brazil and Canada, the impact of swingeing OPEC reductions are proving less-than-effective, to put it mildly. Rather, last November’s supply accord has provided the necessary support for producers elsewhere to fill the output gap.
And this threatens to put the long-term earnings prospects of Cairn Energy and its peers under considerable pressure.
On the one hand the Scottish driller could be considered a more secure bet than many of its peers. As well as sitting on a $335m cash pile as of December, Cairn Energy has $400m worth of debt facilities yet to be tapped. And the company’s gigantic Kraken and Catcher assets in the North Sea remain on track to produce first oil in 2017.
Having said that, I still consider Cairn Energy to be a gamble too far. Not only could massive oversupply in the crude market see the company’s long-term crude price assumption of $70 per barrel miss the target, but the unpredictable nature of oil exploration and production adds another layer of risk for shareholders.
And I reckon further disappointing supply-side news could see Cairn Energy’s share value continue to drop.
Bashed by Brexit?
Serco (LSE: SRP) has suffered no shortage of stock price pain either, the support services provider sinking 22% since releasing worrying full-year financials in late February.
Serco announced that revenues from continuing operations fell 5% last year to £3bn, a result that forced underlying trading profit 14% lower, to £82.1m.
And while the business maintained its full-year sales guidance for 2017, Serco noted that “we think that Brexit offers both risks and opportunities,” adding that “the picture is unlikely to become clear in the short term.”
Business investment in the UK is likely to remain patchy for some time yet as Brexit negotiations continue, a position that could significantly hamper earnings growth at Serco. And I do not believe these troubles are currently baked into the share price given its massive forward P/E ratio of 43.1 times.
I reckon further weakness could be just around the corner.
