Some viewers may read this article's title as expressing investors' frustration with their E&P stocks and/or companies' managements. Others might see it as companies' lament that they are having to sell their production for prices they see as next to nothing. Whether you agree with either, both (or neither) of the preceding interpretations, it is hard to argue that the BOTB Club members have not been punished severely by the market so far in 2016.
The purposes of this article are to update stock and bond performance for each of the BOTB Club members YTD, and to provide the date that each company is scheduled to report its year-end financials, reserves, CAPEX and guidance, to the extent that they haven't already done so. Other companies that are included in my 'Sweet Crude Club' list will be the subject of another article.
The bulk of companies report between Feb. 17-24, as you will see in the table below:
|% Price||% Price|
|Bonanza Creek||(NYSE:BCEI)||SE||2/26 pm||(62)||BCEI4020183||(49)|
|Energy XXI||(NASDAQ:EXXI)||FC||2/20 ah*||(53)||EXXI4219988||(63)|
|EP Energy||(NYSE:EPE)||SE||2/17 ah||(46)||EPEH3921800||(60)|
|EV Energy||(NASDAQ:EVEP)||SE||2/29 pm||(25)||EVNT3815264||(50)|
pm=pre-market. ah= after hours. *= estimated
Despite the fact that BOTB Club members were selected in large part based on the 2015 performance of their stock and bond prices, they have been pummeled during the first six weeks of this year as well. Of the 35 companies which currently are listed for trading, exactly zero (0) are positive on the year; negative returns are (41%) for stocks and (47%) for bonds on average. Obviously, continued weakness in both oil and natural gas prices have impacted stocks, while prices and an exodus of investors from the high yield debt markets have impacted bonds.
The biggest stock losers YTD include Ultra Petroleum, California Resources and Linn Energy, all down more than (70%). Other notable under-performers included Chesapeake, Halcon, Jones, Bonanza Creek, Eclipse and Energy XXI, all down more than (50%).
Bond losses were most severe in companies whose stock was delisted, as expected. Midstates, Goodrich, Sandridge (OTCPK:SDOC) and Penn Virginia suffered losses as high as (99%). Among "survivors," Linn, Chesapeake, Ultra, Halcon, EXCO, Energy XXI and EP Energy all suffered bond losses of 60% or more.
Upcoming press releases are likely to be filled with mostly negative news for BOTB Club members as a group. Reserves and SEC10 values will likely be down by 60-70% from year-end 2015 levels, and 2016 CAPEX and guidance will not provide much good news either. In fact, although investors may at first cheer reductions in CAPEX, they will be much less happy once they discover what reduced CAPEX does to production levels. In a sustained lower price environment, depletion can be just as big a destroyer of value as price declines have been, but higher prices may alleviate some of that and a return of CAPEX by later this year or during 2017 may also help.
Notable Actions in 2016
De-listings - Goodrich (OTCPK:GDPM), Magnum Hunter (OTCPK:MHRCQ), Midstates (OTCPK:MPOY), Penn Virginia, (PVAH), Sandridge and Swift (SFYW). The combined market cap for these companies is currently $38 mm on the OTC BB market, with over 50% of that in Sandridge.
Non-compliant companies - Atlas Resource Partners (1/11), BreitBurn Energy, Emerald Oil, Halcon (8/24), PetroQuest (12/07), Resolute (7/22). In general, companies have 6 months to achieve compliance before they are de-listed. Many companies use reverse splits to achieve compliance, at least temporarily although Emerald, Halcon and Midstates have already gone through one reverse split recently before falling back down below the $1 minimum price threshold again.
Other companies with stock prices < $1 (with current stock price and # of days below $1 in parentheses) - Abraxas ($0.88, 7), Approach ($0.93, 6), California Resources ($0.56, 5), Eclipse ($0.71, 7), Energy XXI ($0.47, 24), EXCO ($0.91, 6), Linn ($0.38, 6), Mid-Con ($0.86, 5), Rex ($0.63, 24), Triangle ($0.40, 56?), and Ultra ($0.60, 2). Energy XXI and Rex will receive notices if their stock prices remain below $1 by the end of the month.
Dividend/distribution cuts - Chesapeake (convertible preferred), Halcon (preferred), Legacy (common and preferred), and Rex (preferred).
Debt exchange/swaps - Denbury (cancelled), Eclipse (cancelled), Vanguard (30% of holders accepted exchange of old notes due 2020 for new senior secured second lien notes due 2023, at a discount of 55%). PetroQuest offered to exchange existing notes for a combination of cash (25%), new senior second lien secured notes (67%) and common stock (roughly 10% of outstanding shares); it received an exchange acceptance from roughly 60% of note holders. Rex is currently out with an exchange offer of old notes for new senior secured second lien notes due 2023 at a discount of roughly 30%, plus common stock equal to 10% of outstanding shares.
The cancellation of the Eclipse and Denbury exchange offer is an ominous sign for E&P companies, who have been hoping that such exchanges will help them restructure their balance sheets without filing for bankruptcy. The performance of previous exchanged debt securities has been dismal as well, possibly leading creditors to feel their best chances for recovery might be through bankruptcy.
The PetroQuest and Rex exchanges, likewise, show a divergence from other companies' previous exchange offers. In addition to including common equity shares (albeit at very low current prices), the new notes in effect allow note holders to retain much of their liquidation preference and interest rate, in addition to upgrading their security status, in return for an extension of maturities. PetroQuest, in particular, had to offer cash and only a 5%-10% discount in price to entice holders to exchange.
Downgrades - Many investment firms have lowered their stock ratings on BOTB Club members since year-end. In addition, ratings agencies have lowered credit ratings as well. In particular, S&P lowered its ratings on Approach, Bill Barrett, Bonanza Creek, BreitBurn, Clayton Williams, Denbury, EP Energy, EV Energy, Gastar, Legacy, Memorial, Northern, Oasis, Resolute, Stone, Triangle, W&T and Whiting. S&P noted increased liquidity risks from pricing and borrowing base reductions, which it expects to be in the range of 20%-30% in April.
Transactions - Comstock (Haynesville acreage swap), Bonanza Creek (sale of Rocky Mtn. midstream assets for $255 mm).
Other - Linn, Midstates and Sandridge all drew down the remainder of their bank credit lines as part of strategies devised by their advisors, either in anticipation of negotiations for restructuring outside bankruptcy or in anticipation of a bankruptcy filing. Eclipse (pre-announced $850 mm impairment), Sanchez (borrowing base reduced to $425 mm from $500, with up to $400 mm in junior liens permitted).
Upcoming press releases
Looking back at what I've written so far might make it seem as if I am focused exclusively on negative items, but that is the nature of the environment for E&Ps currently. I did not purposely exclude anything that might have been positive, and it is the news itself that represents a cascade of negatives.
Having said that, what should readers look for in upcoming press releases and news reports?
1. Impairments - While these do not draw emphasis from management and are often dismissed by investors as non-cash, they are very instructive in determining rough values for a company's reserves (at $50/bbl for oil and $2.60 for natural gas, the SEC pricing at year-end). Actual transactions for property sales are at or below those levels for many areas currently, as current and futures strip pricing is substantially below those figures.
In connection with impairments, it is important to note when a company's shareholders' equity falls below $0, which could be an indication of insolvency. Of course, with most of the BOTB Club members that should not come as a surprise to readers. Of further note is that whatever SEC10 and impairment numbers are published now will likely be higher, maybe even substantially higher, than what companies' banks will be using in setting revised borrowing bases in April; not all companies have existing bank debt, but even those who do not will likely see their availability cut.
2. CAPEX - Some companies have already reported CAPEX well below 2015 levels. While investors may cheer that result, what they may find in the companies' revised guidance (see below) may be an unwelcome surprise, though.
3. Guidance - Updated guidance assumptions are usually provided either in year-end releases or in separate reports. Obviously, each item of revenue and expense is important to note in comparison to result results, but because CAPEX numbers are being cut so dramatically it is very important to note how production estimates compare. Using one recent example, Jones Energy slashed its CAPEX and reported that, as a result, its production would fall 40% yoy by the 4Q '16. EBITDA (or cash flow) before CAPEX would also fall dramatically by then and in subsequent years.
4. Debt - Obviously, debt issues get less mention than items like production, expenses, reserves, etc., but any subtle shifts in management disclosures should send the hairs on the back of readers' necks to attention. Swaps, retention of advisors, plans for debt "management" are all keys to watch for. Property sales, which reduce debt but which often reduce cash flow by a greater percentage, should also raise concerns for investors in this market. Debt spirals can only be reversed by the infusion of additional equity, whether through price increases or stock offerings of some sort. While readers may think the decline "must be nearly over," it is more likely in the 3rd or 4th inning, in my opinion, and many of these companies will not see the 9th.
5. BOEs - I might be remiss if I did not point out that talk of BOEs will fill the air. Before readers get too excited about the disclosures that managements make regarding barrel of oil equivalent in any context, I would suggest reading my recent article about BOE Disclosures here.
As far as other news is concerned, things readers should be particularly cautious about in the coming months include the level of storage at Cushing and US in general (still vastly overstocked), the upcoming "shoulder season" for product demand (as winter ends and before driving season begins), and borrowing base reviews in April. Obviously, OPEC rumors and news will continue to attract much attention from the media; in the meantime, Iran exports will continue to increase up to the next scheduled meeting of OPEC in June.
While thorough, this is not intended to present an exhaustive analysis of the BOTB Club members ahead of earnings. What it should do, however, is serve as a rough industry guide of what to look for. In the meantime, get some popcorn and get ready for a flood of information coming your way, and good luck!
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.