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5 Oil Stocks I Wouldn't Touch With a 10-Foot Pole - The Motley Fool

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The oil market has gone through some insane volatility this year. Prices nosedived from more than $60 a barrel to negative territory. Crude oil has since bounced back from that unbelievable low point as speculators bet that demand will pick back up as the COVID-19 lockdowns abate.

However, with oil prices in the U.S. still below $20 a barrel, and major storage issues ahead, oil stocks face a long road to recovery. Several have already gone under, while many more will likely join them in the coming months. With the risk of a bankruptcy wave, investors need to tread carefully in this sector. Here are five oil stocks I'd avoid at all costs.

A man holding a small barrel of oil with caution written on it in one hand and cash in the other hand.

Image source: Getty Images.

1. Chesapeake Energy

Chesapeake Energy (NYSE:CHK) is dangerously close to filing for bankruptcy protection. Reuters reported earlier this week that it was preparing a potential filing as a way to restructure its massive debt. The company owes lenders nearly $9 billion, including $300 million of debt that matures this summer. While the company may restructure its debt outside bankruptcy, it's still not worth buying. Its management team has done an atrocious job over the years of stewarding shareholder capital because of its sole focus on growth. 

2. Occidental Petroleum

Occidental Petroleum (NYSE:OXY) is another poorly managed oil company. The executives who run the producer so desperately wanted to buy Anadarko Petroleum last year that they outbid Chevron by $5 billion, allowing the oil giant to walk away with a $1 billion breakup fee. They also went around shareholders to complete the deal, which saddled the company with a mound of debt and a costly financing deal with Warren Buffett. That strategy has since backfired because of the oil market crash. Occidental had to slash its dividend and start paying Buffett in stock, diluting existing investors. The company dug such a deep hole that it might never recover. 

3. Continental Resources

Continental Resources' (NYSE:CLR) founder, Harold Hamm, helped drive America's oil revolution by leading the development of the Bakken Shale. However, he's allowed his bullishness to blind him to the volatility of oil prices. He cashed in the company's oil hedges way too early during the oil price crash of 2014 and entered the current market downturn without any price protection. As a result, Continental recently had to shut in nearly its entire operation in North Dakota because its wells were losing money. Hamm's moves have hamstrung the company time and again, destroying shareholder value in the process. 

4. Transocean

Transocean (NYSE:RIG) is one of the world's largest offshore drilling contractors. Unfortunately, it has a debt profile to match. It currently has $8.6 billion of long-term debt, including $4.3 billion coming due over the next two years. Those near-term maturities will be hard to refinance, given its junk-rated credit and the fact that one rival recently declared bankruptcy, while another seems likely to follow. These issues could plunge the offshore driller into bankruptcy with its peers. 

5. U.S. Oil Fund

The U.S. Oil Fund (NYSEMKT:USO) is an exchange-traded fund that attempts to follow the daily gyrations of the main U.S. oil price benchmark. However, it does a lousy job. Instead of holding physical oil, it trades oil futures contracts. It often needs to pay money to roll them into the future, which eats into its returns. Unsurprisingly, then, the fund has lost nearly all its value over the years. Another crude-oil price nosedive into negative territory could cause this oil ETF to implode.

While oil prices might rally, these oil stocks are likely to fall short

There's a lot of interest in oil stocks these days. The general thesis is that what went down must go back up. While I, too, hold that oil prices will eventually rebound, I think there will be a lot of carnage in the oil patch before that happens. That's why I think investors should tread cautiously, since many oil stocks -- including most of this list -- probably won't make it through this downturn.

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5 Oil Stocks I Wouldn't Touch With a 10-Foot Pole - The Motley Fool
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