Look, there’s no polite way to say this, but many energy stocks are in dire straits. The current “lower for longer” environment — with crude oil not breaking $50 per barrel — is killing many of the smallest shale players.
Sure profits and cash flows at a giant like Exxon (XOM) have been suffering, but for those firms who expanded so heavily via cheap debt to fund drilling programs, the current price matrix is a death sentence.
One that could come with a rise in the number of energy stocks filing for bankruptcy.
U.S. energy stocks currently had nearly $169 billion in debt outstanding at the end of June. That’s more than double the $81 billion they had outstanding at the end of 2010. What’s more, FactSet pegs energy stocks cash flow shortages at a whopping $30 for just the first half of 2015.
But there’s opportunity to profit from the pain in energy.
With bankruptcy risk very real for some energy firms, investors looking to cash in could take the plunge and engage in a bit of short selling. And while many of the energy stocks in the worst shape have fallen hard already, a bankruptcy filing means that investors won’t have to cover their short anytime soon.
It’s risky, but for those investor swilling to do a bit of gambling, shorting some energy stocks could be a huge win.
Here’s three that could be the next to file for bankruptcy and go to the oil patch in the sky.
Energy Stocks Ripe For Short Selling #3: Goodrich Petroleum (GDP)
Goodrich Petroleum (GDP) could have been one heck of an energy stock over the longer term. The shale producer is the leading player in the Tuscaloosa Marine Shale.
The TMS has the potential to be the next Eagle Ford based on its geology and contains billions of barrels worth of crude oil and natural gas. The problem is that its costs an arm and a leg to drill there.
And as one of the most expensive regions to drill a well, tapping it at $45 per barrel is a losing proposition. That wouldn’t be so bad, if you’re XOM and you can sit on the acreage for a few years while waiting for prices to rebound.
Unfortunately for GDP, it can’t wait. Goodrich is saddled with a ton of debt. The energy stock has liabilities of more than $710 million. Which is a problem when its entire market cap is $42 million, your revenues were only $50 million and its costs about $30 million in interest charges to service that debt.
Needless to say, GDP — despite its potential — is probably not going to be with us before the end of the year, making it a great candidate for short selling.
Energy Stocks Ripe For Short Selling #2: Energy XXI (EXXI)
Energy XXI’s (EXXI) main drag was buying older/ageing shallow water wells in the Gulf of Mexico that larger energy stocks didn’t want anymore, and using enhanced oil recovery to squeeze out additional barrels of crude oil.
Even when oil isn’t so high, EXXI was able to squeak out a decent living. The problem for Energy XXI was — like oh so many firms — it made a huge buyout right when prices were peaking.
That deal left EXXI full of debt — $5.4 billion in total liabilities, to be exact.
Alongside rising interest expenses and unprofitable drilling operations (thanks to the drop in crude oil), EXXI has tried to negotiate with its creditors. The energy stock has tried to do a few debt swaps, which trades out old bonds for new ones with longer maturities and lower payments. That hasn’t gone to well as many of EXXI’s creditors have balked at the swaps.
That doesn’t leave EXXI in a very good position going forward and some analysts have expressed that bankruptcy could be looming.
With that in mind, EXXI could be one of the best energy stocks to sell short this year.
Energy Stocks Ripe For Short Selling #1: Halcon Resources (HK)
On the surface, Halcon Resources (HK) isn’t doing too badly. The firm has decent acreage positions in the Bakken/Three Forks and Eagle Ford shales. The problem for HK — as with many struggling smaller shale players — comes down to debt.
In order to fund its drilling programs and torrid production growth, HK took on a lot of debt — currently at $3.7 billion. This included tacking on an additional $700 million at the start of the year.
That was all well and good when oil prices were rising. But with things now “lower for longer,” HK is in a world of hurt. Especially since the firms revenues and cash flows are basically being eaten up by interest expenses.
Adding to HK’s hurt could be its reliance on its credit line for liquidity. While the firm has a hefty credit line still available, the idea of using more debt to stay afloat isn’t exactly a great idea.
Secondly, many analysts are predicting that banks are going to cut credit to energy stocks hard over the next few months as oil prices stay low.
None of this puts HK in a great position to survive the downturn. High debt, low cash flows and daddy cutting up the credit card, makes for an interesting short position.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.