CHK Chesapeake Energy Corporation

By Nicole Friedman and Timothy Puko 

Oil prices fell to their lowest point in seven years Monday, hammering energy industry stocks as many investors bet that heavily indebted producers, having weathered months of low commodity prices, are now at greater risk of going out of business.

The selloff hit companies in the markets for oil, petroleum products, natural gas and coal. Oil prices have fallen so low for so long now that many investors worry that some companies won't be able to generate enough income to stay in business and pay off loans no matter how much oil they pump.

Monday's declines were triggered by forecasts of mild weather that point to tepid U.S. heating demand through the end of the year. They extended a rout set off last week when the Organization of the Petroleum Exporting Countries opted to keep its production high.

Prices for oil and natural gas have lost more than one-quarter of their value in the U.S. so far this year, thanks to robust output and growing inventories. The prospect of soft demand and unrestrained supply is undermining hopes for a turnaround.

"Investors can't see any evidence that things will get better," says Dan Pickering, co-president and head of TPH Asset Management in Houston, which oversees about $1.5 billion.

Oil futures fell 5.8% to $37.65 a barrel in New York, the lowest settlement since February 2009. Natural-gas futures fell 5.4% to $2.067 per million British thermal units in New York, the lowest level since October.

Shares of a number of high-profile energy companies posted even deeper losses. Among the biggest losers Monday were Consol Energy Inc., the biggest producer of natural gas and coal in the Appalachian Basin, which was down 15%, and Williams Cos., the Tulsa, Okla.-based operator of pipelines and other infrastructure, which was down 13%.

Bonds were battered as well. Bonds of Chesapeake Energy Corp., which is seeking to restructure some of its debt through an exchange offer, traded at 32.8 cents on the dollar, a decline of 17%, according to data from MarketAxess Holdings Inc. Oasis Petroleum Inc. bonds shed 6% to trade at 79 cents. A bond from EP Energy LLC traded at 80 cents, down about 5%.

The pessimism around energy even spread to pipeline-and-storage companies that had long been billed as havens from the ups and downs of the underlying markets. Investors are now concerned the broader pain will slow the acquisitions and dividend growth that had drawn them to the sector.

The NYSE Alerian MLP Index, a widely followed benchmark of pipeline and transportation companies, tumbled 6.2% on Monday. "Nobody is safe," said Tim Parker, portfolio manager in the U.S. equity division at T. Rowe Price Group Inc.

Pain from the oil bust already has rippled throughout the industry. Energy companies have laid off hundreds of thousands of employees around the world, and oil-producing nations from Venezuela to Russia are struggling with lower revenue.

The U.S. energy industry, which has boomed in recent years due to technologies like hydraulic fracturing and horizontal drilling that have opened vast new fields, has taken a hard hit.

Pipeline firm Kinder Morgan Inc. said Friday it would review its dividend policy, a move the market has interpreted as a sign that it and similarly situated firms may cut or cancel payouts to shareholders to shore up cash.

Consol illustrates the topsy-turvy path some companies have followed during the energy boom. The Pittsburgh-area company paid $3.5 billion to buy gas rights near its Appalachian mines in 2010 and shrank its longtime coal-mining business to focus on the cleaner-burning fuel, then suffered as its shares fell more than 80% this year.

Like many of its peers, Consol keeps expanding production, telling investors in October that it plans to increase gas output by 20% in 2016.

In doing so it has locked itself into a cutthroat race with other gas drillers. This summer, the company announced that it found one of the biggest gushers in U.S. history, only to see gas prices and its own share price continue to fall out of fear similar wells would keep the market glutted for years.

"They need to cut their capital spending," says Rob Thummel, portfolio manager at Tortoise Capital Advisors, which manages $14.6 billion in energy assets.

Consol is selling assets to raise cash and balancing its budget using "conservative commodity prices," a company spokesman said in a statement. "Proceeds from these assets sales will help de-lever the company, continuing to strengthen our balance sheet and liquidity position."

Many oil-and-gas companies find it nearly impossible to cut back because of the large debt loads they took on to fund their growth when energy prices were higher. That leaves many producing just to pay their debts. Meanwhile, hedges that have allowed them to sell oil and gas above the market rate are expiring.

"We think that next year there's going to be more pain in the sector" says David Yepez, investment analyst at Exencial Wealth Advisors in Oklahoma City, which manages $1.4 billion. "I think things are going to get worse before they get better."

The El Niño weather phenomenon has limited demand for natural gas and other heating fuels in the U.S. this year. Forecasts released Monday show above-average temperatures persisting for the next two weeks, at a time of year when demand for indoor heating is typically robust.

Temperatures in cities in the Midwest and East Coast could range between 15 and 25 degrees warmer than usual for the next 10 days, says Matt Rogers, meteorologist and president at Commodity Weather Group LLC.

Some traders say it is risky to bet on further declines for oil prices that are already down 29% on the year and well below $40--a level under which analysts say many producers can't make money and will have to cut back.

As of Dec. 1, money managers including hedge funds had made an unusually large number of bets that U.S. crude prices would fall, according to Commodity Futures Trading Commission data.

That could spark a sharp rally if fund managers close out those positions at once, traders say. That happened in August, sending prices up 27% in three sessions.

But Mr. Pickering says mutual funds and other large investors are reluctant to buy beaten-down shares and bonds during the last month of the year.

Until global oil inventories begin to shrink, Mr. Pickering says, "the bears are in control."

Gregory Zuckerman contributed to this article.

Write to Nicole Friedman at nicole.friedman@wsj.com and Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

December 08, 2015 00:09 ET (05:09 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.