With the price of West Texas Intermediate (WTI) collapsing to new 2015 lows near $42 a barrel, many US oil exploration companies are finding themselves in a living nightmare.
The days of strong balance sheets, positive cash flow, and profitable production are a becoming a distant memory.
Those good times (which remarkably, really weren’t that long ago) have been replaced with plunging share prices, stressed balance sheets, negative cash flow, and crushing debt payments.
I hate to say it, but the current crude oil downturn is starting to look worse, and may ultimately do more damage to the industry than the 2008 financial crisis.
As you may remember, crude and the share price of oil explorers crashed to incredibly low prices in 2008 as fear seized investors’ collective mindset.
However, the industry rebounded relatively soon after the 2008 crash. By the middle of 2009 crude was pushing back above $75 a barrel on it’s way to $80 by year-end. As a result, oversold oil producers experienced remarkable rallies in 2009.
In fact, names like Continental Resources (NYSE:CLR) and Whiting Petroleum Corporation (NYSE:WLL) advanced by 100% and 250% respectively that year.
But this time it’s different…
The most recent global supply/demand data suggests the price of WTI may stay subdued at multi-year lows through 2015, and possibly into 2016. So far, Middle Eastern oil producers are making good on their promise to keep production high and retain market share.
That fact, along with stubbornly high US production, has the potential to push crude into the high $30 a barrel range soon.
Here’s the deal…
An extended bout of low oil prices could very well be the death knell for shale explorers with high costs of production and/or heavy debt loads.
Which oil stocks should you avoid at all costs?
Here’s a short list
- Sandridge Energy (NYSE:SD)
The last time I wrote about this company in April it was trading for nearly $2 a share. But thanks to the headwinds mentioned above, SD common stock has plummeted to $0.50- an eye-popping 70% downturn in a matter of months.
- Goodrich Petroleum Corporation (NYSE:GDP)
This company’s foray into the Tuscaloosa Shale of Louisiana and Mississippi looked highly promising in early 2014. But now GDP’s stake in this high-cost acreage could lead to its downfall. Shares of the highly indebted producer are trading for a mere $0.88- a sickening 80% downturn since April.
- Penn Virginia Corporation (NYSE:PVA)
With a promising position in the Eagle Ford shale of Texas, PVA was a strong buyout candidate in mid-2014. But with oil’s collapse it appears any interested buyers would rather pick up the acreage after PVA goes bankrupt. The cash-hemorrhaging producer has been marketing its Eagle Ford position for months, but no one seems interested.
- Emerald Oil (NYSE:EOX)
If you really want to see what an obliteration of investor capital looks like, check a chart of EOX. This once promising Bakken producer has turned into a long-term investors’ nightmare. Even after a 1-for-20 reverse split and a secondary offering in 2015, EOX is stuck near all-time lows around $2.
- Halcon Resources (NYSE:HK)
Incredibly indebted HK has been a highly hyped turnaround story for years. But with shares now trading under $1- a 50% downturn since April and an 87% nosedive in the past year -- investors are better off going to the casino.
No doubt about it, the oil names above have seen their brighter days.
Here’s the deal…
Due to their drastically reduced share prices it will get even harder for the above companies to raise much needed capital via secondary offerings. That means they’ll likely be forced into a distressed seller of their assets, or go hat in hand into the debt markets- neither of which are good options right now.
Of course, there’s always the potential for a life-saving joint venture, but even then the bullish effect on the share price would be questionable.
Bottom Line
All the oil exploration names above are in trouble- loads of it.
So whatever you do, don’t flush you’re hard earned cash down the toilet by investing in them. Given the bearish headwinds for crude, it truly is a crap shoot as to whether these companies survive the next year or not.
It’s more important than ever you heed that advice…
Until Next Time,