We Still Have a Buck in the Till; We’re Solvent!

Photo Credit: Luz Bratcher
Photo Credit: Luz Bratcher

Imagine that you are in the position of a high cost crude oil producer that has a lot of debt to service. ?The price that you can sell your oil for is high enough?that you make some?cash over your variable cost. ?The price is low enough that you are not recouping the cost of what you paid to buy the right to develop the oil, the development cost, and cost of equity capital employed.

In this awkward situation you continue to produce oil, because it may keep you from defaulting on your debts, even though you are not earning what is needed to justify the GAAP book value of your firm. ?You’re destroying value by producing, but because of the debt, you don’t have the option of waiting because not surviving loses more money than pumping oil and seeing if you can survive.

Where there is life, there is hope. ?Who knows, one of three?things could “go right:”

  1. Enough competitors could fail such that global industry capacity reduces and prices rise.
  2. Demand for oil could rise because it is cheap, leading prices to rise.
  3. You could get bought out by a more solvent competitor with a longer time horizon, who sees the assets as eventually valuable.

Trouble is with #1, you could fail first. ?With #2, the process is slow, and who knows how much the Saudis will pump. ?With #3, the price that an acquirer could pay might not be enough for shareholders, or worse, they could buy out your competitors and not you, leaving you in a worse competitive position.

One more thought: think of the Saudis, the Venezuelans, etc… all of the national oil companies. ?They’re not in all that different a spot than you are. ?They need cash to fund government programs or they may face unrest. ?For some like the Saudis, who assets in reserve, the odds are lower. ?For the Venezuelans, who have had their economy destroyed by the politics of Chavez, the odds are a lot higher.

There will be failures among energy producers, and that could include nations. ?Failures with?each will be temporary as debts get worked through/compromised and new management takes over, and high cost supply gets shut down. ?The question is: who will fail and who won’t. ?The job of the hypothetical firm that I posited at the beginning of this article is to survive until prices rise. ?What will a survivor look like?

  • Relatively high contribution margins (Price – variable cost per barrel)
  • Relatively little debt
  • Debt has long maturities and/or low coupons.

Now, I’m going to give you 40% of the answer here… I’m still working on the contribution margin question, but I can give you a useful measure regarding debt. ?My summary measure is total debt as a ratio of market capitalization. ?It’s crude, but I think it is a good first pass on debt stress, because the market capitalization figures carry an implicit estimate of the probability of bankruptcy.

Anyway here’s a list of all of the oil companies in the database that have debt greater than their market cap:

Company Country ticker Mkt cap Debt / Market Cap
Energy XXI Ltd Bermuda EXXI 171 26.93
SandRidge Energy Inc. United States SD 264 16.63
Comstock Resources Inc United States CRK 146 9.45
Linn Energy LLC United States LINE 1,172 8.81
EXCO Resources Inc United States XCO 213 7.2
Cosan Limited(USA) Brazil CZZ 1,015 6.34
W&T Offshore, Inc. United States WTI 245 6
Halcon Resources Corp United States HK 620 5.89
BreitBurn Energy Partners L.P. United States BBEP 614 5.05
Magnum Hunter Resources Corp United States MHR 188 5.05
California Resources Corp United States CRC 1,325 4.92
Sanchez Energy Corp United States SN 368 4.74
Crestwood Equity Partners LP United States CEQP 543 4.64
Rex Energy Corporation United States REXX 171 4.51
Penn West Petroleum Ltd (USA) Canada PWE 403 4.19
Atlas Resource Partners, L.P. United States ARP 365 4.09
Gastar Exploration Inc United States GST 108 3.8
Petroleo Brasileiro Petrobras Brazil PBR 35,748 3.71
Stone Energy Corporation United States SGY 292 3.59
Bill Barrett Corporation United States BBG 252 3.19
EP Energy Corp United States EPE 1,552 3.15
Memorial Production Partners L United States MEMP 599 3.05
Premier Oil PLC (ADR) United Kingdom PMOIY 828 2.95
Triangle Petroleum Corporation United States TPLM 286 2.88
Ultra Petroleum Corp. United States UPL 1,281 2.68
Bonanza Creek Energy Inc United States BCEI 333 2.55
Northern Oil & Gas, Inc. United States NOG 359 2.47
Denbury Resources Inc. United States DNR 1,479 2.37
Jones Energy Inc United States JONE 354 2.36
Chesapeake Energy Corporation United States CHK 4,917 2.35
Vanguard Natural Resources, LL United States VNR 833 2.27
LRR Energy LP United States LRE 128 2.23
Pengrowth Energy Corp (USA) Canada PGH 705 2.21
Legacy Reserves LP United States LGCY 461 2.1
Aegean Marine Petroleum Networ Greece ANW 391 1.85
GeoPark Ltd Chile GPRK 202 1.8
Mitsui & Co Ltd (ADR) Japan MITSY 23,727 1.74
Oasis Petroleum Inc. United States OAS 1,390 1.69
Santos Ltd (ADR) Australia SSLTY 3,813 1.59
Whiting Petroleum Corp United States WLL 3,593 1.46
Midcoast Energy Partners LP United States MEP 558 1.45
Paramount Resources Ltd (USA) Canada PRMRF 1,006 1.35
Encana Corporation (USA) Canada ECA 5,944 1.33
Clayton Williams Energy, Inc. United States CWEI 597 1.25
Clean Energy Fuels Corp United States CLNE 468 1.23
EV Energy Partners, L.P. United States EVEP 405 1.23
WPX Energy Inc United States WPX 1,660 1.2
Baytex Energy Corp (USA) Canada BTE 1,068 1.19
ONEOK, Inc. United States OKE 7,453 1.18
SunCoke Energy Partners LP United States SXCP 505 1.18
TransAtlantic Petroleum Ltd United States TAT 126 1.13
Global Partners LP United States GLP 1,071 1.12
NGL Energy Partners LP United States NGL 2,659 1.12
Sprague Resources LP United States SRLP 495 1.11
Amyris Inc United States AMRS 266 1.07
Sunoco LP United States SUN 1,605 1.06
SM Energy Co United States SM 2,360 1.05
Solazyme Inc United States SZYM 202 1

 

This isn’t a complete analysis by any means. Personally, I would be skeptical of holding any company twice as much debt as market cap without a significant analysis. ?Have at it your own way, but be careful, there will be a lot of stress on oil companies with high debt.

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