Oil prices have dropped dramatically this year. At one point, WTI, which is the main benchmark for oil prices in the United States, cratered in negative territory because market speculators had to pay to leave their positions because they had nowhere to store oil. oil. This implosion in the oil market has put enormous pressure on the finances of the energy sector.
As a result, several oil companies have already filed for bankruptcy while many others are assessing this possibility. We asked our energy contributors which ones they thought were most likely to produce by the end of the year. They see the greatest risk for this outcome atCallon Petroluem (NYSE: CPE), Chesapeake Energy (NYSE: CHK), Diamond Offshore (NYSE: DO), and Occidental Petroleum (NYSE: OXY).
A perfect storm
John Bromels(Callon Petroleum): If I was looking for the “ideal” candidate in the petroleum industry to declare bankruptcy in 2020, I would try to find a company that:
- has a high debt level
- don’t have a lot of money on hand
- obtained an “undesirable” credit rating from at least one rating agency
- is overexposed to American shale
- took steps to restructure its debt
Callon Petroleum, an independent oil and gas exploration and production (E&P) company, checks these five boxes. Wall Street has already taken note: Callon’s shares are down 88.8% so far this year.
Trouble started for Callon when she made a risky acquisition at exactly the wrong time. In December, it acquired its Texan counterpart E&P Carrizo Oil and Gas. Callon was already a 100% Texas shale game (and the rest), but now he’s taken $ 1.7 billion in debt from Carrizo. This brought Callon’s total long-term debt down to $ 3.2 billion, or 4.5 times EBITDA, in exchange for an area of Texas shale that is now of questionable value.
Although most of Callon’s debt does not mature until 2023, it has only $ 13.3 million in cash, which is hardly a cushion. The company’s credit rating was already undesirable, but given current conditions,Moody’s andS&P Globalboth lowered their credit rating to B- / B3, or “highly speculative”. April 1, citing confidential sources,Reutersreported that Callon was working with advisers to help restructure his debt.
Callon appears to be in extremely high risk of bankruptcy this year.
On the support of life
Matt DiLallo(Chesapeake Energy): The financial situation of Chesapeake Energy is dire. The oil and gas driller entered the year with debt of $ 8.9 billion, of which approximately $ 300 million is due this year. The company planned to meet these deadlines by selling $ 300 million to $ 500 million in nonessential assets.
This plan, however, has gone out of window now that oil prices have cratered due to the COVID-19 epidemic. The company has alreadyallegedly hired advisers to help him restructure his debt, which could include filing for bankruptcy. This seems to be near certainty, becausea great driller has already filedwhile several others are preparing to do the same. Meanwhile, one of Chesapeake’s biggest investors – both in debt and equity – has alsoconsultants hiredto assist him in negotiations with Chesapeake.
Unless there is a rapid economic recovery fueling soaring oil prices, Chesapeake Energy is likely to file for bankruptcy sometime this year, likely by July 1, when it has to pay down its debt to 136 millions of dollars.
Ideally, Chesapeake and its creditors will accept a prepackaged bankruptcy agreement that will preserve a portion of the equity. However, given the amount of its debt outstanding and the current level of distress in the oil market, a more likely outcome will be the complete elimination of common shareholders. Because of the extreme probability that Chesapeake’s shares will end up worthless, investors should avoid this.energy company.
Poorly synchronized merger
Travis Hoium (Western oil):Sometimes acquisitions happen at exactly the wrong time for an action, and that’s where I think Occidental Petroleum ends up after the $ 55 billion acquisition of Anadarko Petroleum last year. The acquisition indebted Occidental in debt and this is what could ultimately lead to its demise if oil prices do not rise rapidly.
You can see in the graph below that $ 35 billion of net debt is hanging over the business, and with the stock slump in recent weeks, options for raising capital could run out. Worse, management has touted a hedging strategy that has left the company exposed to falling oil prices below $ 45 a barrel. At one time it seemed unthinkable, and now it seems like a dream price for the West.
I don’t think oil prices will rebound anytime soon, so producers will have to hope that oil prices will rise so as not to lose too much money on each barrel sold, but this can be a difficult task given the negative prices that we saw recently.
Then there is the overabundance of stocks that could force producers to close wells that may never come back online. The damage will first hit high leverage companies and Occidental will do the trick.
A cascade of faults to come
Jason Hall (Diamond Offshore):Although the focus has been on independent American oil producers who are most at risk from the coronavirus crash, offshore drilling contractors are also struggling. And it looks like the first one to fall will be Diamond Offshore, after the surprising announcement that the company would skip an interest payment due on April 15.
Skipping a single interest payment may not seem like a big deal, but it’s not the same as a consumer who misses a credit card payment. For Diamond Offshore, as well as most of the corporate debts carried by other companies, when a company defaults on a loan, it triggers a chain reaction of defaults on essentiallyall of his debt.
As a result, Diamond Offshore wired its intention to recapitalize, which would require filing for bankruptcy, and which would almost certainly eliminate more than 95% of the equity held by common shareholders.
The company has technically until mid-May before being in default, but has retained both legal and financial representation, and it is likely that it is already negotiating with its creditors to reach an agreement to d ” exchange most of its debt for common stocks. This is what will wipe out the shareholders, and why it is better not to buy Diamond Offshore shares until the conditions of its almost certain bankruptcy are announced.
In the current environment, a pre-negotiated agreement is not guaranteed, and there are far too many risks to even make a speculative investment in the business right now.
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