E&P 'Bottom Of The Barrel Club' Issue #2: Of Stocks And Bondage

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Includes: AREX, ARP, AXAS, BBEPQ, BBG, BCEI, CHK, CRC, CRK, DNR, ECR, EOX, EPE, EVEP, EXXIQ, GDPM, GST, HK, JONE, LINEQ, MCEP, MCF, MEMP, MPO, NOG, PQ, PVAHQ, REN, REXX, SD, SGY, SN, TPLM, UPLMQ, VNR, WTI, XCO
by: Raw Energy

Summary

Since its introduction a month ago, Bottom of the Barrel Club members have seen significant equity and debt price declines.

Already, two members declared bankruptcy, so additional companies are added and the list is expanded.

Comparative equity price performance, as well as selected debt, enterprise and EBITDA figures are presented and analyzed.

Comparative bond price statistics are presented for the initial maturity of each company, along with ratings information and yield to maturities.

With no letup in selling pressure evident, the author concludes that BOTB Club members are more appropriate for trading than for investing, and that holding to investment criteria is key.

Investors may very well feel like they've been whipped by the markets lately. In addition to major equity market declines in many E&P stocks in 2015, debt markets also experienced major bond wreckage ("bondage") as well.

A month ago, I introduced the 'Bottom of the Barrel Club.' To be honest, my original idea some months back was just to keep track of a group of E&P companies that had been punished by the market, ultimately with the hope that I would identify companies whose punishment I considered "unfair."

As I started to construct the list (or "accept Club membership applications"), I saw or thought of several distinguishing features beyond just simple stock market declines that might make a company a candidate for survival… or not. By the time I was ready to unveil the Club, I had expanded Club "requirements" to include one or more of the following factors:

  1. A stock price of less than $5/share, a price now considered by the SEC to be in the "penny stock" category;
  2. A stock market capitalization of less than $1 billion;
  3. A stock price decline of more than 80% since June 30, 2014, the day on which most E&P companies' stock prices topped out;
  4. An announced or expected restructuring effort required to repair balance sheet damage, especially including debt swaps and second secured lien debt issuances;
  5. The hiring of investment banking firms to advise a company about its "strategic options;"
  6. Shareholders' equity either negative or approaching $0 or, in the case of successful efforts companies, recalculations of the same applying the more rigorous full cost standards for impairments; or
  7. Bond pricing providing yields to maturity (YTM) of greater than 10% above Treasury yields, a typical threshold for identifying "distressed securities."

This article will summarize a few changes in the makeup of the Club, establish year-end 2015 baseline #s as a means of evaluating stock market performance for the past year and for future reference, provide some historical financial metrics that will be updated once year-end figures are provided, and provide a means for readers to track the bond market performance of company debt in addition to typical stock market prices.

First, just as 'The Talking Dead' honors those who were lost in the current episode of 'The Walking Dead', I will acknowledge the departure of 2 founding members of the Club: Magnum Hunter Resources and Swift Energy. Both of these companies filed for Chapter 11 bankruptcy in December. If they are followed from this point forward, it would more likely be in an update to the bankruptcy article I recently published rather than here among the living.

At the same time, several other companies have "submitted Club applications" by qualifying under one or more of the tests above. From this point forward, they will be considered full-fledged members of the Club, thus entitling them to all the "advantages" that membership holds. The companies added to the list are Bonanza Creek Energy (NYSE:BCEI), California Resources (NYSEMKT:CRC), Chesapeake Energy (NYSE:CHK), Contango Oil and Gas (NYSEMKT:MCF), Denbury Resources (NYSE:DNR), and EP Energy (NYSE:EPE).

The table below shows the 2015 stock market performance of each of the Club members, as well as performance since June 30, 2014 and since December 8, 2015, the date of the publication of my earlier article. From now on, I will use January 1, 2016 as the commencement date for tracking future performance.

In addition to the stock performance columns, I have included data from a couple of earlier articles of key metrics many consider to be important in evaluating E&P companies. The extensive tables with data provided are in the articles below, depending on the accounting method used:

Full Cost Impairments

Successful Efforts Impairments

I caution readers, though, that these metrics have NOT been updated to include 3Q numbers due to vacation and family health issues; frankly I do not believe the data or the conclusions one might reach from analyzing or comparing them will make a significant difference. I will attempt to update the data once year-end 2015 figures are available.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
% Price % Price % Price Equity Adjusted Est Total Debt % Debt/ Annzd Annzd EBITDA Tot Ent Free
Price Change Change Change Market Debt @ Enterpr of Total EBITDA Ex Hedge/ Value/ Annzd Cash Thru
Company SYMB Acct 12/31/15 1 month 1 year 06/30/14 Cap 12/31/15 06/30/15 Value Enter Val Ex Hedge Interest EBITDA 06/30/15
Abraxas (NASDAQ:AXAS) FC 1.06 (20) (64) (83) 113 113 226 50% 2.5 12.6 5.0 (40)
Approach (NASDAQ:AREX) SE 1.84 (17) (71) (92) 74 499 573 87% 6.2 3.3 7.2 (107)
Atlas (NYSE:ARP) SE 1.03 (30) (90) (95) 90 1,667 1,757 95% 7.0 2.7 8.3 (53)
Barrett (NYSE:BBG) SE 3.93 (37) (65) (85) 197 800 997 80% 4.0 2.9 5.0 (102)
Bonanza Creek BCEI SE 5.27 (38) (78) (91) 262 850 1,112 76% 7.2 4.2 9.4 (197)
BreitBurn (BBEP) SE 0.67 (67) (90) (97) 142 3,641 3,783 96% 18.4 0.8 22.5 26
California Resources CRC SE 2.33 (43) (58) (71) 900 6,476 7,376 88% 6.9 2.9 7.9 (208)
Chesapeake CHK FC 4.50 (15) (77) (86) 2,993 15,002 17,995 83% 6.0 7.3 10.1 (1,775)
Comstock (NYSE:CRK) SE 1.87 (26) (73) (94) 89 1,379 1,468 94% 7.9 1.6 8.4 (173)
Contango MCF SE 6.41 (17) (78) (85) 124 111 235 47% 1.6 17.0 3.5 (48)
Denbury DNR FC 2.02 (45) (75) (89) 721 3,509 4,230 83% 11.4 1.9 13.7 90
Eclipse (NYSE:ECR) SE 1.82 (28) (74) (93) 405 430 835 52% 5.7 1.4 11.0 (242)
Emerald (NYSEMKT:EOX) FC 1.13 (26) (95) (99) 9 316 325 97% 18.7 2.1 19.6 (123)
Energy XXI (EXXI) FC 1.01 (36) (69) (96) 96 4,007 4,103 98% 100.0 0.1 103.0 (137)
EP Energy EPE SE 4.38 (23) (58) (81) 1,090 4,893 5,983 82% 6.5 2.3 7.9 (239)
EV Energy (NASDAQ:EVEP) SE 2.81 (19) (85) (93) 137 499 636 78% 5.5 1.7 7.1 635
EXCO (NYSE:XCO) FC 1.24 (2) (43) (79) 339 1,537 1,876 82% 11.0 1.3 13.4 (85)
Gastar (NYSEMKT:GST) FC 1.31 19 (46) (85) 106 567 673 84% 15.8 0.9 25.9 (42)
Goodrich (GDP) SE 0.27 (33) (94) (99) 16 963 979 98% 12.4 0.9 19.6 (94)
Halcon (NYSE:HK) FC 1.26 (59) (86) (97) 744 4,269 5,013 85% 6.2 2.5 8.3 (194)
Jones (NYSE:JONE) SE 3.85 (31) (66) (81) 238 1,349 1,587 85% 6.2 2.2 11.8 (89)
Legacy (NASDAQ:LGCY) SE 1.75 (44) (85) (94) 121 1,226 1,347 91% 8.9 1.5 12.5 55
Linn (LINE) SE 1.29 (36) (87) (96) 435 10,395 10,830 96% 649.7 0.0 676.9 286
Memorial (NASDAQ:MEMP) SE 2.64 (28) (82) (89) 222 1,829 2,051 89% 16.6 1.0 18.6 (16)
Mid-Con (NASDAQ:MCEP) SE 1.14 (51) (82) (95) 34 200 234 86% 7.7 3.3 9.0 10
Midstates (NYSE:MPO) FC 2.02 (39) (87) (97) 145 2,327 2,472 94% 13.9 0.9 17.9 (11)
Northern (NYSEMKT:NOG) FC 3.86 (25) (32) (76) 238 886 1,124 79% 4.1 4.1 5.3 (76)
Penn Virginia (PVA) SE 0.30 (33) (96) (98) 22 1,287 1,309 98% 7.1 2.0 7.2 (166)
PetroQuest (NYSE:PQ) FC 0.50 (32) (87) (93) 33 425 458 93% 6.5 1.7 8.5 201
Resolute (NYSE:REN) FC 0.87 7 (34) (90) 67 733 800 92% 13.1 1.0 14.3 29
Rex (NASDAQ:REXX) SE 1.05 (23) (79) (94) 58 935 993 94% 13.2 1.2 17.1 (106)
Sanchez (NYSE:SN) FC 4.31 (14) (54) (89) 263 2,017 2,280 88% 6.3 2.2 8.2 (194)
SandRidge (NYSE:SD) FC 0.08 (60) (94) (99) 39 5,811 5,850 99% 16.7 1.0 22.2 (310)
Stone (NYSE:SGY) FC 4.29 (41) (75) (91) 245 1,058 1,303 81% 7.1 3.6 8.7 70
Triangle (NYSEMKT:TPLM) FC 0.77 0 (84) (93) 59 790 849 93% 7.0 0.4 54.0 (300)
Ultra (UPL) FC 2.50 (50) (81) (92) 383 3,430 3,813 90% 8.8 4.5 9.8 (36)
Vanguard (NYSE:VNR) FC 2.98 (48) (80) (91) 259 2,226 2,485 90% 10.0 2.3 13.1 108
W&T (NYSE:WTI) FC 2.31 (38) (69) (86) 175 1,469 1,644 89% 5.7 2.8 6.4 (122)
TOTALS 11,680 89,921 101,601 (3,775)
Click to enlarge

There are several noteworthy conclusions one can make from the data in the table:

  1. Even starting out as the Bottom of the Barrel, these companies' stock prices were off almost 40% in December alone. Only 2 companies, EXCO and Resolute were up, while 13 companies were down by more than 50%, "led" by Halcon, BreitBurn, California Resources, and Denbury down by more than 55%.
  2. No companies' stock prices were up for the year 2015 and none for the period beginning June 30, 2014 either. The median price was down (78%) in 2015, with Penn Virginia, Emerald, Goodrich, BreitBurn, Atlas Resources, and LinnCo all down (90%) or more. For the period from June 30, 2014, 23 of the 38 companies were down (90%) or more.
  3. The total enterprise value of the 38 companies in the revised Club (including Chesapeake, EP Energy, California Resources, Denbury and Bonanza Creek), was $102 billion. Of that, less than $12 billion, or 11% was the market cap of common shareholders' equity, and 25% of that was due to the inclusion of Chesapeake and EP. Considering that most E&P lenders equity roughly equal to debt in advancing funds (i.e. 50% loan to value or 2:1 coverage of debt), that shows Club members to be short over $90 billion in equity once time for refinancing rolls around, a stunning shortfall.
  4. Free cash flows for the entire Club membership (operating cash flow less CAPEX), including hedges, were negative for the 6-month period, a result that is unlikely to change when year-end results are tabulated. CAPEX plans for 2016 will be announced shortly and should be within cash flows based on early indications, but now the questions will relate to profitability and potential growth prospects given a reduced level of CAPEX and production declines due to same.
  5. I included annualized EBITDA numbers excluding hedges as well, primarily because hedges are non-recurring, and they will be ramping down as each quarter progresses. Hedge book values are already recorded on the balance sheets so have not been ignored, and my earlier articles do contain numbers both with and without hedging for the 6-month period. I would be surprised to see them change much in the year-end financials, but updated guidance will give a better indication of future results and impacts of hedge roll offs.

The table below reflects data about one unsecured debt issue from each of the BOTB Club members. I believe it shows the first such maturity, generally in the 2019-2021 timeframe, to allow for a comparison across companies' debt situations from the vantage point of the bond market. Obviously, the higher the YTM, the lower the probability the bond market is assigning to the company's chances of avoiding bankruptcy and/or significant restructuring. The bond market is often considered the more sophisticated market for assessing the financial health of companies.

All of the data has been obtained from the FINRA bond site, which is free to any investors/readers. There you can obtain a listing of all current prices of any company's debt securities by searching by the name or stock symbol, and you can obtain quotes for a specific issue by entering its trading symbol or CUSIP #. Price and yield charts are usually available, and you can also see individual trading history. Finally, by clicking on "add to Watchlist" you can track any securities you wish to, up to 50 symbols saved at the site.

1 2 3 4 5 6 7 8 9 10 11 12
Stk Bond Price Price Price Current
Company Symbol Symbol CUSIP Coupon Maturity Moody's S&P 12/31/15 12/31/14 Chg 2015 YTM
Abraxas AXAS (NONE)
Approach AREX AREX4015973 03834AAA1 7.000% 06/15/21 Caa1 B- 36.00 70.12 (49) 33.1%
Atlas ARP CVX4078787 049296AC0 7.750% 01/15/21 Caa3 CCC+ 19.94 74.97 (73) 58.1%
Barrett BBG BBG3827968 06846NAD6 7.000% 10/15/22 B3 CCC+ 67.05 93.54 (28) 14.8%
Bonanza Creek BCEI BCEI4020183 097793AB9 6.750% 04/15/21 B3 CCC+ 60.27 88.00 (32) 19.8%
BreitBurn BBEP BBEP.AC 106777AB1 8.625% 10/15/20 Caa3 CCC+ 22.50 90.00 (75) 57.5%
California Resources CRC (NONE)
Chesapeake CHK CHK4020185 165258AB0 6.625% 11/15/19 Caa2 CCC+ 34.15 79.88 (57) 41.4%
Comstock CRK CRK.AA 205768AH7 7.750% 04/01/19 Caa3 CCC 18.00 72.25 (75) 85.5%
Contango MCF (NONE)
Denbury DNR DNR.GF 247916AC3 6.375% 08/15/21 B1 BB- 36.00 95.00 (62) 28.7%
Eclipse ECR ECR4260686 27890GAA8 8.875% 07/15/23 Caa1 NR 48.25 100.00 (52) 26.9%
Emerald EOX (NONE)
Energy XXI EXXI EXXI4219988 29276KAV3 9.250% 12/15/17 Ca CCC- 29.25 67.00 (56) 109.4%
EP Energy EPE EPEH3921800 268787AB4 7.750% 09/01/22 B1 B 50.00 90.50 (45) 20.8%
EV Energy EVEP EVNT3815264 26926XAB9 8.000% 04/15/19 Caa1 B- 50.54 88.91 (43) 35.4%
EXCO XCO XCO.AB 269279AD7 7.500% 09/15/18 Caa3 D 27.32 74.50 (63) 65.1%
Gastar GST GST4127542 36729WAA1 8.625% 05/15/18 Caa2 CCC+ 54.00 87.88 (39) 40.7%
Goodrich GDP GDP3815330 382410AF5 8.875% 03/15/19 Ca D 8.00 50.12 (84) 153.0%
Halcon HK HK4001501 40537QAB6 9.750% 07/15/20 Caa3 D 27.00 75.90 (64) 54.7%
Jones JONE JONE4221431 48019TAB0 6.750% 04/01/22 B3 NR 48.95 92.62 (47) 22.3%
Legacy LGCY LGCR4088741 52471TAB3 8.000% 12/01/20 Caa1 B- 28.00 84.00 (67) 40.9%
Linn LINN LINE3910261 536022AK2 6.500% 05/15/19 Caa3 B- 18.00 88.45 (80) 78.8%
Memorial MEMP MEMP4031047 586049AB4 7.625% 05/01/21 Caa1 CCC+ 32.00 94.02 (66) 38.6%
Mid-Con MCEP (NONE)
Midstates MPO MPO4061114 59804VAB1 10.750% 10/01/20 Caa3 CCC- 13.75 54.50 (75) 92.5%
Northern NOG NOG3913730 665531AB5 8.000% 06/01/20 Caa1 B- 61.50 79.07 (22) 22.1%
Penn Virginia PVA PVA.GD 707882AC0 7.250% 04/15/19 Ca CC 14.00 76.30 (82) 98.1%

PetroQuest

PQ PQ.AB 716748AA6 10.000% 09/01/17 Caa1 B- 68.03 87.50 (22) 37.7%
Resolute REN REN3982260 76116AAB4 8.500% 05/01/20 Caa2 CCC 44.48 48.50 (8) 33.8%
Rex REXX REXX4061115 761565AB6 8.875% 12/01/20 Caa2 CCC+ 29.00 90.00 (68) 47.1%
Sanchez SN SN4017358 79970YAB1 7.750% 06/15/21 B3 B- 61.00 94.00 (35) 19.8%
SandRidge SD SD.AE 80007PAL3 8.750% 01/15/20 Caa3 D 12.00 68.75 (83) 101.2%
Stone SGY SGY4006465 861642AN6 1.750% 03/01/17 NR B- 69.00 88.50 (22) 37.2%
Triangle TPLM TPLM4144923 U89573AA4 6.750% 07/15/22 46.75 68.00 (31)
Ultra UPL UPL4079295 903914AA7 5.750% 12/15/18 Caa3 B+ 23.00 92.75 (75) 72.1%
Vanguard VNR VNR3840075 92205CAA1 7.875% 04/01/20 Caa2 B 30.41 88.35 (66) 47.2%
W&T WTI WTI.AC 92922PAC0 8.500% 06/15/19 Caa1 CCC+ 33.17 66.50 (50) 52.2%
Click to enlarge

As I mentioned above, a YTM of greater than 10% above Treasuries is usually considered "distressed," and by that definition the entire Club is distressed. Those least distressed include Bill Barrett, Bonanza Creek and Sanchez as the only issuers with YTM less than 20%. The most distressed list includes Goodrich Petroleum, SandRidge, Energy XXI, Penn Virginia, Midstates, Comstock and Linn, all with YTMs greater than 75%.

These debt figures are likely to trigger more "going concern" comments in the financials at year-end, since they are likely in many cases to be in excess of reported SEC10 values. Such disclosures alone can often trigger liquidity events, as the capital markets adjust to much lower quality ratings and possible covenant breaches.

Noteworthy actions

A sector or group/Club overview like this, coupled with data presented in previous articles, provides a great deal of information but still cannot substitute for a detailed review of individual company actions and prospects. For that I would refer to other authors' articles and some of my own. Nevertheless, there are trends or specific actions that can be noted here, including:

  1. The "D-List" - Actually, the term is delist, and it is what a trading exchange can do to companies that no longer meet its listing standards. Since companies usually want to retain some access to capital markets at all cost, most will attempt to regain compliance, which means either raising new equity capital and/or regaining a stock price of $1 through whatever means available. Companies who have either been notified that they will be delisted or will become eligible since their stock prices are below $1 include Goodrich, Penn Virginia, PetroQuest, Triangle, BreitBurn, Resolute, Atlas, Halcon, Abraxas and Rexx. Linn, Energy XXI, Emerald, Gastar and EXCO are only slightly above that level.
  2. Reverse splits - Of note is that Halcon and Emerald have already conducted reverse splits to achieve compliance with the $1 price limit, but both had now traded back down below that level. While reverse splits may be necessary to regain $1, valuations of companies often change since higher trading prices will usually trade more on fundamentals while low priced stocks, particular at $2 or less, trade more as options. Obviously, though, more reverse splits are likely.
  3. Debt swaps - Linn, Halcon, Goodrich, California Resources and Chesapeake have all entered into swaps of senior secured second lien debt recently. Since the high yield unsecured bond market has also virtually collapsed for new offerings, secured second lien issues have become the security of choice for E&P companies. However, even these issues have seen poor trading results, with several deals off 50% and offering YTM that leave them well under any distressed issue threshold. A reduction or collapse in this market would be devastating going forward, as capital is necessary if for no other reason than to refinance upcoming maturities.
  4. Asset Sales - Asset sales among highly indebted companies, particularly those that are at or near their borrowing base, have been few and far between. In addition to a wide bid/ask spread, companies must generate proceeds in excess of the properties' borrowing base value in order to gain any leeway in borrowing base; otherwise proceeds go to the banks, borrowing bases get reduced by a similar amount and the company is back to being maxed out, requiring still more future sales, etc. This is known in the industry as a "debt spiral;" it might be friendlier to call it "an orderly liquidation" or some such concept, but the end result has not been pretty in past downturns. In 2016, banks would have been more likely to pressure borrowers to sell assets, but the recent price declines in oil may prevent that as well; M&A prices usually require a period of price stability in the range of 9-12 months before bid/ask and pricing expectations are able to converge.

Trading Environment

A man once inherited a lot of money, and he developed a hobby of attending auctions, looking for pieces that piqued his interest. One day at an auction, a can of smoked salmon was offered, and although he wasn't a particular fan of salmon, as the bidding rose he became intrigued as to what special qualities this particular salmon possessed. As bidding became frantic, he finally decided he had to know, and he kept bidding until the other bidders all dropped out, ultimately paying a huge price for this valuable can of salmon.

Looking forward to tasting what he had just bought, he rushed home and opened the can of salmon, intending to take his time to savor every bite. However, after only a few bites, he became violently ill, and spent the rest of the day in the bathroom with "digestive distress." The next day, once he had recovered, he went back to the auction house and demanded his money back.

To his amazement, the auctioneer resisted and with a quizzical look said to the man, "You obviously did not know what you were bidding on. If you did, you would have known that this was not EATING salmon, it was TRADING salmon."

This is a trading environment, not necessarily an investing environment, unless investors are truly aware of and willing to take the risks that this entails. Over the past 18 months, there have been short term, sometimes vicious rallies, followed by similarly strong declines; investors have lost big time, as the table above shows, but traders not necessarily so because of shorter timeframes on their investment horizon.

Trading in "penny stocks" is notoriously hectic and potentially "gamed" by traders, so readers are cautioned that just because a stock moves does not mean it will keep moving. Investors need to see investment attributes that make a stock worth owning, or else be aware that what they are buying is the stock equivalent of a canned smoked salmon. That is what year-end figures and guidance will help reveal in the coming weeks.

In a more technical sense, E&P stocks remain locked in a downtrend, even after year-end tax selling and other factors mentioned in my previous article(s). I've mentioned several other negative factors that may impact prices during the first half of 2016 in particular, and even this week's news have already added to those the potential impact of a China slowdown and the strength in the trade-weighted U.S. dollar as weights on the price of oil.

I would prefer to wait for some sign that other, more powerful investors than me are accumulating stock before initiating positions in E&P stocks. So far, there have been no indications of that, and in fact BOTB Club members are almost universally below every significant moving average from 10 days to 500 days, indicating no strength whatsoever. Big investors will move stocks upward in price on volume, so the key is to watch for that to happen at least somewhere within a watchlist of these or other sector stocks.

Conclusion

This is a brief, maybe not so positive but not completely negative, overview of recent events and outlook for 2016 activity for members of the BOTB Club. After year-end 2015 results have been released, I will likely prepare the next issue of this "Club newsletter," or when particularly noteworthy trends or events occur. A timetable for such releases/events is in another of my previous articles HERE.

Maybe the ultimate answer to the question "When will these stocks stop going down?" is "When everybody is so sick of seeing them go down that they don't even care to ask the question anymore." That point has not been reached, but a key for opportunistic investors is to be patient enough to wait for signs, or to trade based on full knowledge of the risk/reward relationship of what is being traded.

Many investors undoubtedly feel chained to their investments, which is why setting appropriate dollar or percentage loss levels upfront is very important, as is diversification and sizing of a position within a portfolio. Establishing and holding fast to investing principles is far more important than holding an emotional attachment to a stock, and that can be a key to whipping the market going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.