The oil and gas industry is difficult to invest in when the economy is going great. But in these difficult times, many companies are facing an existential threat. Already at least 24 oil companies have declared bankruptcy due to the novel coronavirus pandemic. Callon Petroleum (NYSE:CPE) may very well be joining a list that includes Whiting Petroleum (NYSE:WLL) and Chesapeake Energy (OTCMKTS:CHKAQ). But somehow CPE stock continues to draw the attention of investors.
But after an ill-timed acquisition, the company has a multitude of problems. And ultimately, the answer may be bankruptcy.
CPE Stock Is Loved by Robinhood Investors
I’m probably becoming loathed by Robinhood investors. However, in fairness, they’re making it very easy. In early March, only 4,000 accounts were holding its stock. As of this writing over 76,000 Robinhood members are seeking to be the smartest guy in the room.
But to be fair, that number was over 100,000 earlier in the month.
On the surface, I get it. David Moadel wrote about the temptation of a stock that is such a fast mover. In the last month, I’ve seen the stock post a gain of over 10% and a loss of at least that much, or more. Josh Enomoto even gave a spirited effort at defending the bullish premise.
But I can’t. At face value, I get it. If you have an appetite for risk, CPE stock is an interesting gamble. And I use that word on purpose. Because ultimately you have to understand that if you’re shopping at the oil and gas clearance rack during a pandemic, you’re not investing.
Callon Has Serious Problems
For starters, Callon is heavily invested in shale production. That’s a very expensive way to extract oil. And they’ve shut in a good bit of their production. So even if oil prices go up significantly, they’re going to be late getting to that party.
And Callon needs revenue. The company took on $1.7 billion of debt in December when it acquired another shale company, E&P Carrizo Oil and Gas. That extra debt took Callon’s total long-term debt to $3.2 billion. And in return they got shale acreage that is dropping in value by the day.
But most of Callon’s debt doesn’t mature until 2023, right? Well I’m glad you did your homework. However, the company is still cash poor and its credit rating (already at junk status) was lowered. And, not only was its rating lowered, so was its credit line. This leaves the company with less than $500 million to draw down. It’s the equivalent of having your credit card issuer cutting your limit by 15% when you were close to your limit.
And Then There’s That Supply-Demand Thing
And I haven’t even gotten to the big elephant in the oil patch, Covid-19. If you haven’t noticed, it’s not going away. At least not as fast as we would all like. Until it does, there is no real hope for meaningful demand to return.
Cruise ships may begin sailing at limited capacity and on limited routes sometime this fall. But that is written in pencil. Airlines are asking employees to take early retirement to avoid inevitable furloughs.
And putting aside your personal politics, when President Donald Trump acknowledges that things may get worse before they get better, you might just need to listen.
If you think I’m painting a grim picture, I’m glad. Investing requires us to be realistic. Otherwise it’s just gambling. And that takes me to my final point.
Major League Baseball returned July 23. The National Basketball Association and National Hockey League start soon after. If you have been using the market to satisfy a gambling fix, I encourage you to use the return of live sports as the match to burn a hole in your pocket.
But you need to find another stock to gamble on than CPE stock.
Don’t Get Caught Holding CPE Stock
According to Callon’s website, the Houston Chronicle voted Callon one of the top places to work for the last three years. That may be true, but it doesn’t change the troublesome math the company faces.
Callon may be a great stock to trade on Robinhood. But it’s in danger of robbing you of your riches and giving it to its creditors. Don’t let that be your fate.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.