What would you think of the long-term prospects of a business that paid you to buy their products? That’s an oversimplification of what occurred to the May futures contract for oil on April 20. The price for that contract sold for a negative price for the first time in history.
The crisis befalling the oil companies at this time can best be described as “only the strongest survive.” There’s just no way the oil companies can possibly handle month after month of rock-bottom oil prices.
The problem is almost comically simple to understand. There is a massively reduced demand for oil as millions of Americans are following mitigation orders ranging from social distancing guidelines to more restrictive shelter in place orders. At the same time, the market is trying to absorb the oversupply of oil that came from Russia and Saudi Arabia.
However, when the year started, things looked like it might be business as usual for oil producers. The U.S. economy was humming along and there was talk that the second half of the year might finally bring the boost to oil prices that many companies badly needed.
However, since the middle of February, the bottom has dropped out of the market in general, and oil prices have been one of the main sectors to feel the impact.
Initially, investors tried to remain optimistic. A month ago, investors thought that the economy might be reopening sooner rather than later. However, the exact timing of the reopening is about as fluid as a barrel of oil. And with it looking more likely that there will be more demand destruction at least through May, there’s very little to prop up the stock of any oil companies.
And that means that, in all likelihood, there will not be room left for some oil companies. We’ve highlighted five oil stocks that have a strong probability of not surviving the chaos surrounding the coronavirus and our nation’s response.
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- Whiting Petroleum
- Chesapeake Energy
- Occidental Petroleum
#1 - Whiting Petroleum (NYSE:WLL)
Whiting Petroleum (NYSE:WLL) was the first major oil company to throw in the towel. The company filed for bankruptcy on April 2 after the first crash in oil prices. Just two years ago, Whiting was valued at almost $5 billion and was one of the shining stars in the shale industry. The company had properties in North Dakota’s Bakken oilfield.
Under terms of the bankruptcy, Whiting will exchange $2.2 billion of debt for equity. That will allow Whiting to make the best use of the $600 million of cash it has on its balance sheet. However, based on the company’s free cash flow, they have a runway of less than one year.
The problems for Whiting will be said for many of the companies in this presentation. The company is underperforming an already weak oil and gas sector. Over the last 12 months, WLL stock has declined by 98.9%. Overall, the sector has declined by 49.4%.
Fundamentally, Whiting is not profitable and is not expected to be profitable in the next three years. But a larger problem is that the company is also expecting to post lower and lower revenue over the next three years.
Furthermore, WLL has a high debt to equity ratio of 69.6%. However, that has come down from the 98% level it was at five years ago.
About Whiting Petroleum
Whiting Petroleum Corporation, an independent oil and gas company, engages in the acquisition, development, and production of crude oil, natural gas, and natural gas liquids primarily in the Rocky Mountains region of the United States. The company sells its oil and gas production to end users, marketers, and other purchasers.
Read More - Current Price
- $68.03
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#2 - Chesapeake Energy (OTCMKTS:CHKAQ)
Chesapeake Energy (NYSE:CHK) stock was troubled since last year. However, there were many investors that believed the CHK stock was priced so low it couldn’t help but go up. But then oil stocks got hit by the double whammy of the coronavirus and the pricing war between Russia and Saudi Arabia.
To be fair, falling oil prices due to the novel coronavirus are a major factor to the misfortune of CHK stock. And even blue-chip energy companies such as Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) are trading at three-year and ten-year lows respectively.
But Chesapeake Energy had problems before the virus. And those problems are only being magnified by the falling oil prices. A very real and pressing concern will be the cost of servicing an increasing debt level.
Chesapeake has engaged in a reverse stock split. The company is also tapping into a $3 billion credit facility, and they have announced a plan to sell off assets. All of this has the sound of a company that’s playing defense. Because while this is a move they had to make, it will put the company under financial pressure with revenue certain to decline.
But here may be the most difficult math to work through. At the end of 2019, Chesapeake had $8.9 billion of outstanding debt. The company had just under $8.6 billion in total revenue. Now consider that over the next five years, the company will have to retire $4.9 billion of debt with interest payments. This just doesn’t seem like a story that ends well for CHK stock.
About Chesapeake Energy
Chesapeake Energy Corp. is an independent exploration and production company, which engages in acquisition, exploration and development of properties for the production of oil, natural gas and natural gas liquids from underground reservoirs. It focuses on projects located in Louisiana, Ohio, Oklahoma, Pennsylvania, Texas, and Wyoming.
Read More - Current Price
- $3.05
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#3 - Occidental Petroleum (NYSE:OXY)
Oil stocks, particularly drilling stocks are always a gamble. However, when Occidental Petroleum (NYSE:OXY)made its big bet on buying Anadarko Petroleum, critics were already saying the company paid too much. Occidental got into a bidding war for Anadarko and wound up funding the deal by selling $10 billion of preferred stock to Warren Buffett.
Investors’ worst fears were realized on March 9, 2020. The price of oil dropped nearly 30% before the markets opened. And just like that Occidental’s short-term fate was sealed. Not only did the company cut its quarterly dividend over 80% (from 79 cents to just 11 cents), it also announced it was cutting capital spending by 32%.
For investors, this is a tough pill to swallow. OXY’s share price is down 80% in the last 12 months, the bulk of that happening since the beginning of 2020.
The company’s CEO, Vicki Hollub was optimistic the company could break even with U.S. benchmark oil prices in the low $30s. But that price level is long gone, and with it a lot of hope for Occidental stock.
Like other shale producers, OXY relies on oil to be selling at a high price per barrel to fund its oil drilling and exploration initiatives. In 2016, a number of shale-reliant companies entered bankruptcy as oil prices dropped.
About Occidental Petroleum
Occidental Petroleum Corporation, together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, and North Africa. It operates through three segments: Oil and Gas, Chemical, and Midstream and Marketing. The company's Oil and Gas segment explores for, develops, and produces oil and condensate, natural gas liquids (NGLs), and natural gas.
Read More - Current Price
- $50.91
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 12 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $63.65 (25.0% Upside)
Financially, oil companies simply are not structured to handle extremely low oil prices long term. Some of the companies in this presentation have lost over two-thirds of their value just in 2020. For many companies in other sectors, a potential solution is to raise capital, perhaps through the bond market. That is not an option for many of the oil companies in this presentation as the bond markets are closed off to troubled companies.
Many of the companies in this presentation are shale producing companies. Many shale companies were struggling to achieve profitability before the coronavirus outbreak torpedoed short-term demand for oil. Companies with high debt levels are more likely to be affected.
Prior to the recent crash in oil prices, some analysts were saying that 2020 could bring another wave of bankruptcies, particularly for shale companies.
That prediction appears to be coming to fruition. In an interview with Houston media, Buddy Clark, co-chair of the energy practice at Houston law firm Haynes and Boone, said his firm is “extremely busy” and that he is hopeful there will only be 100 oil bankruptcies in 2020.
“It’s hard to believe that 100 bankruptcies is the optimistic view. That just shows you where we are,” said Clark.
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