So far, the new year has been pretty sour for many energy stocks as oil and gas prices have refused to firm up.
And it could worse — waaaaay worse — before it gets any better.
For instance, we’ve now dipped to about $30 per barrel of oil — a price not seen since 2003. That price stinks even if you’re an integrated giant like Exxon Mobil Corporation (XOM). But for small energy stocks focusing on domestic shale assets, it’s a death sentence.
The reason? Debt.
Much of the shale boom has been fueled by debt — after all, it’s expensive to buy acreage, frack and pay a midstream firm to haul your product to market. But while big-time debts weren’t a problem for energy stocks when oil was priced in triple digits and natural gas was above $5 per MMBtus, prices of $30 per barrel and $2 per MMBtus creates some big income problems.
That makes it difficult to pay the interest expense on more than $353 billion worth of debt — the amount of long-term debt saddled on North American producers.
The landscape is ugly. Already more than 30 small energy stocks and producers have filed for bankruptcy. But according to Wolfe Research, as many as one-third of all American energy stocks could file for bankruptcy by mid-2017.
These six energy stocks could be on that list.
Energy Stocks in Danger of Folding: SandRidge Energy Inc. (SDOC)
SandRidge Energy (SDOC) could have been one of the best energy stocks of all time. The firm was born from energy royalty, former founder and CEO Tom Ward. Ward put together a host of strong asset in America’s newest shale fields and the Gulf of Mexico that were poised for success.
Unfortunately, Ward and SandRidge’s subsequent leaders pumped it full of debt to create it and keep it going.
As of the end of last quarter, SDOC was buried in just under $4 billion in long term debt (versus a market cap of $36 million), and according to S&P Capital IQ, SandRidge paid more than 40% of its revenues toward interest on that debt.
To combat the problem, SDOC has sold tons of assets, reconfigured its strategy/businesses plan multiple times and most recently, suspended payments on its preferred shares.
But it might be too little too late. SandRidge stock has sunk to just more than 6 cents per share and have been delisted by the New York Stock Exchange, going from the ticker SD to SDOC. What’s strange is that the company didn’t fight the delisting nor come up with a reasonable plan to keep it on the big boards.
There’s little that can save SandRidge at this point.
Energy Stocks In Danger of Folding: Energy XXI (EXXI)
Sometimes good energy stocks can make on bad move and it could cost them dearly. Case in point- Energy XXI (EXXI).
EXXI made its living through buying up old oil fields and wells in the Gulf of Mexico that other operators didn’t want. The energy firm was able to use enhanced oil recovery techniques to coax more oil out of these older wells.
Energy XXI decided to then purchase EPL Oil & Gas for around $2 billion. That firm had a penchant for finding pockets of oil that needed EXXI’s extraction methods.
Sounds like a recipe for long-term gains, right?
Well, it would have been had Energy XXI not done the deal right as oil prices were peaking. Instead, EXXI found itself sitting on a debt load in excess of $4 billion.
While EXXI did try to restructure some of that debt, its creditors denied the attempt; the firm then bought about $900 million in its own bonds on the open market. Unfortunately, Moody’s considered that a default and downgraded its debt further into junk status.
The situation at XXI Energy has deteriorated to the point where EXXI shares are now in penny stock status, going for just more than 60 cents per share.
They might be going for nothing within another year.
Energy Stocks in Danger of Folding: Penn Virginia Corporation (PVAH)
Penn Virginia Corporation (PVAH) has a long operating history in the coal, natural gas and midstream industries. While the coal and midstream assets were spun off as master limited partnerships and later sold, Penn Virginia still remains.
PVAH’s primary assets are located in the Eagle Ford and Marcellus shale. That sounds great at first blush, but like many on this list the price to gain those assets were quite large. Penn Virginia now has around $1.2 billion in long-term debt.
The problem is that Penn Virginia isn’t large enough.
PVAH has sold around $75 million in non-core Texas assets to help pad its balance sheet. However, it doesn’t have the scale needed to really work the acreage it has left nor make some serious bank off of selling it. Its latest asset sale was for a measly $13 million.
Meanwhile, the losses keep coming, and just a few days ago, Penn Virginia was delisted by the NYSE for “abnormally low” price levels. Between the high debt and no real way to see it through, PVAH might soon make a final descent from its current 8-cent share price to nothing.
Energy Stocks in Danger of Folding: Halcón Resources Corp (HK)
Halcón Resources (HK) actually has some pretty darn good assets. HK has built out some decently sized acreage positions in the Bakken/Three Forks and Eagle Ford shales — exactly the kind of fields that many larger energy stocks would want to have.
So HK- like its previous incarnation Petrohawk — should be a big-time buyout candidate, right?
The problem is the huge debt tied to those assets. As of the end of last quarter, HK had around $3.1 billion in debt and was paying a pretty burdensome interest expense on it that eats up the bulk of its revenues. Any acquirer would have to either pay off that amount or take it over. Without it, that acreage becomes more attractive as profitability will no longer be hindered by high interest expenses.
Considering that Halcón has basically been living off its other credit cards for liquidity for some time now, analysts expect that HK will need to file for bankruptcy sooner or later.
And it’s already a delisting threat, with shares now trading under the $1 mark — even after a 1-for-5 split back in late December.
Energy Stocks in Danger of Folding: Goodrich Petroleum (GDPM)
The Tuscaloosa Marine Shale could have been the biggest thing since sliced bread. The field features vast geology that is similar to the Eagle Ford, so theoretically, it could pump out lots of crude oil per well.
And when it came to energy stocks, rising star Goodrich Petroleum (GDPM) was the way to play the field.
The problem for Goodrich is that the TMS is ungodly expensive to drill. Some analysts have placed the breakeven number in the $90 per barrel area.
With oil at $30, GDPM’s acreage is as good as dead.
Meanwhile, Goodrich has a huge debt load that’s expensive to service and eats away at any revenues the firm has. Goodrich tried to combat this by suspending dividend payments on its Series B, C and D convertible preferred stock, then issued new Series E preferred shares that should pay a dividend. That got rid of some immediate worry — and the new preferreds even came with a 10% starting yield — all that did was kicked the can down the road a bit.
GDPM still is in all sorts of trouble. Its chief financial officer recently fled the coop, and its shares have been delisted, triggering a dip to below a dime per share.
Energy Stocks in Danger of Folding: Chesapeake Energy Corporation (CHK)
It’s no secret that Chesapeake Energy (CHK) is the poster child for hurting energy stocks. Natural gas is down. Oil is down. And CHK’s debt continues to be pretty darn high.
That $17 billion in total liabilities comes from way that former CEO Audrey McClendon built the firm as it expanded into every shale field imaginable. The sprawling CHK was a tour du force when natural gas was super high. However, in today’s age of ultra-low prices, it’s more of a hindrance. And while CHK has sold a ton of assets to help boost its balance and keep itself afloat, it might not be enough.
The firm still has a very high cash burn and with prices for energy still falling, CHK is making less money every well it drills. With that in mind, doing a preemptive bankruptcy filing may actually be in its best interest.
Its bond holders think that chance is near. Several of its long term bonds can now be had for 31 cents on the dollar and yield a whopping 29%. This just goes to show that not all the energy stocks that a suffering are small players.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.