The continued rout in oil prices has left many energy stocks in free fall. For some — like Range Resources (RRC) or EOG Resources (EOG) — there’s some legitimate potential for long term bottom fishing. After all, the long-term picture is bound to be rosier for the top names in the sector.
Other energy stocks, however, are more speculative in nature. There are investments, and there are gambles … and it’s important to note the difference.
With lower oil and natural gas prices, high debt burdens and potentially unfriendly regulations, a number of energy stocks have essentially become bets on a rebound in energy prices before the underlying firms call it quits. But, like most gambles worth taking, there’s enormous upside should things go their way.
Basically, these energy stocks will boom, or they’ll bust.
If you’ve got the funds for a little speculating, here are five such energy stocks that could explode to the upside under the right conditions.
Boom-or-Bust Energy Stocks to Buy: Goodrich Petroleum (GDP)
The slump in oil prices hit Goodrich Petroleum (GDP) hard. Really hard. Like, GDP-is-now-a-penny-stock hard. That’s right — Goodrich fell from a peak of around $30 per share in 2014 to less than 70 cents today.
So, Goodrich isn’t just a gamble — it’s a pretty cheap one.
The reason for Goodrich’s fall (but also the reason for its potential) is within its main area of operation, the Tuscaloosa Marine Shale. The TMS is one of the most underdeveloped and promising shale fields in the country. Early estimates of the field show that the reserve potential is huge, at more than 7 billion barrels. The problem is that the field is very expensive to drill, which doesn’t make sense to do with oil at $40 per barrel.
Goodrich’s main assets lie within the field. Whatever it owned outside of the TMS has now been sold or is on the auction block to raise cash. It needs that cash to strengthen its balance sheet, which is riddled with high-interest debt.
Still, GDP is the only pure play on the Tuscaloosa Marine Shale, and if oil prices do rebound, GDP shares could soar. The question is how long Goodrich can hold out before it’s too late.
Boom-or-Bust Energy Stocks to Buy: Linn Energy (LINE)
As a publicly traded limited liability company, LINE has many similarities to a master limited partnership, including its function as a pass-through entity that pushes much of its cash flows back into shareholder wallets as distributions … but that doesn’t leave a lot in the kitty to weather downturns. LINE recently surprised analysts and investors alike when it cut its rich payout to zero to conserve cash.
That’s a much-needed move, as like many speculative energy stocks, Linn Energy is weighed down in debt.
And it certainly needs to do that. Like many speculative energy stocks, LINE is full of debt. Specifically, Linn Energy is saddled with $10.3 billion in long-term debt, which is harrowing for a company worth less than $800 million by market capitalization.
The dividend cut will save LINE about $450 million per year, and the E&P firm also is working to whittle down its debt by purchasing it back at super discounted levels. Meanwhile, thanks to its hedge book, LINE still generates some decent cash flows. And, it’s worth mentioning that Linn Energy also boasts some attractive assets.
LINE stock just needs some help from oil prices.
Boom-or-Bust Energy Stocks to Buy: SandRidge Energy (SD)
For most of its existence, SandRidge Energy (SD) has been a huge disappointment for investors … but now that it has reached penny-stock status, it might finally pay off as a speculative energy bet.
SandRidge’s problem is and long has been debt. Previous founder and CEO Tom Ward loaded SD with financial burdens, and likewise, recently “retired” Eddie LeBlanc piled on another $1.25 billion onto its balance sheet.
Today, SandRidge is being smothered by $4.4 billion in debt despite being a merely $210 million company.
At least SD is finally addressing the problem.
SandRidge recently made a deal with lenders to refinance $525 million in debt. SandRidge will buy back $250 million face value in senior unsecured notes for $94.5 million, and exchange another $275 million for convertible bonds that mature in 2022 and 2023. That pushes a chunk of its obligations out further and gives it more time for oil to rebound.
Meanwhile, SD’s 1.85 million acres in the fertile Mississippian Oil shale of northern Oklahoma and southern Kansas sit atop 11,000 drilling locations. If SD can continue to repay and refinance its debt, those drilling locations could be quite valuable as oil rebounds (or if another larger, better-run firm decides to buy).
Boom-or-Bust Energy Stocks to Buy: Swift Energy Company (SFY)
Swift Energy (SFY) is a particularly special case. Swift holds assets in the Eagle Ford and Louisiana shales, but the company is neither prolific, nor does it have much in the way of energy reserves.
That’s a problem, as SFY doesn’t have much cash that it can use to drill or add to that acreage.
Swift recently tried to organize a $640 million bond offering, but that effort has fallen on deaf ears. That issue would have gone to repay and refinance some of its heavy debt load … but SFY might not need it.
The key for Swift is that much of its debt, doesn’t come due until 2017 and 2022. That gives Swift plenty of time for oil prices to come back before it even needs to think about bankruptcy proceedings.
SFY could do well amid higher oil prices, but also if it manages to refinance more of its debt.
Boom-or-Bust Energy Stocks to Buy: Arch Coal (ACI)
While we’ve been discussing oil-related energy stocks, they’re far from the sector’s only victims right now. Arch Coal (ACI) has suffered continued dwindling demand, environmental regulatory pressures and dropping commodity prices.
In fact, ACI needed a 1-for-10 reverse split to keep itself out of penny-stock status.
Arch Coal needs to refinance its huge debt load — a slow-going process, apparently. And seemingly every day, the firm’s shares react to every bit of news on that front.
Bankruptcy risks are very real here. None of the issues that have hurt ACI in the first place — the continued switching to natural gas, EPA crackdowns and falling global coal demand — have been eliminated. Meanwhile, the firm is bleeding cash and hasn’t been profitable in some time.
A rebound in coal prices would send ACI booming — so it’s good for a gamble — but investors looking at the long term have no business playing this stock.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.