Yes, it is true that TV's 'The Walking Dead' returned last night, but frankly, the idea of a spread of the zombie virus beyond those initially infected had come to me quite a while ago. Then, as I prepared a companion piece to this article, for the Bottom of the Barrel Club, it occurred to me that we are already there. This article follows the same format as the BOTB Club article, but has been modified to account for the difference in companies in most places.
I had more or less tried to contain the oil price/debt virus by designating the BOTB members to isolate them from their healthier brethren, the members of the Sweet Crude Club, but just as it is in all the zombie shows, eventually even some of the original survivors become infected. There is no such thing as a "safe zone," and so it seems to be with the Sweet Crude Club. The walls have been breached, and some members have potentially been infected.
One advantage of keeping track, even on a macro basis, of an entire subsector like E&P companies, is that the overview it gives is sometimes more valuable than the minute detail one can pick up from following a single company. Even though I was keenly aware of the deterioration in the stock prices of the BOTB Club, and even to some extent with the bond prices of those same members' securities, it was only in assembling similar data for the Sweet Crude Club members that I realized the full extent of the deterioration in the financial standing of some members of the SC Club as well.
The table below shows, for each company, the expected release date and accounting method, as well as YTD information for their stock and bond prices. Although companies usually release data regarding their CAPEX and reserve information prior to the release of their financial and operating results, this year many companies are combining all of those disclosures into one.
|% Price||% Price|
|Clayton Williams||(NASDAQ:CWEI)||SE||2/25 pm||(59)||CWEI.AA||(40)|
|Pioneer Natural||(NYSE:PXD)||SE||2/10 ah||(8)||PXD.GH||(2)|
|RSP Permian||(NYSE:RSPP)||SE||2/24 ah||(20)||RSPP4166894||(8)|
Unlike the BOTB Club, which had exactly zero (0!) companies with stock and/or bond gains YTD, the Sweet Crude Club actually had 6 companies do so on the stock side. Antero, Cabot, Gulfport, Range and Southwestern, the top 5, all have production in the Marcellus/Utica areas, which have been the subject of substantial reserve growth, albeit in a weak price environment with short term infrastructure issues.
On the flip side, two companies, Clayton Williams and Whiting, had stock losses of more than (50%). SM, Energen, Oasis, Laredo and Devon had losses of more than 30%. Overall, though, average losses for the Sweet Crude Club members were negative (16%) vs. negative (41%) for the BOTB Club members.
On the bond side, the same companies stand out, with lesser losses and lesser gains for the most part. The average bond price for Sweet Crude Club members was negative (15%) vs. a negative (47%) for BOTB Club members.
It is surprising to me to see companies like Devon and Energen see losses of this magnitude, as they have traditionally been strong performers. The same goes for Whiting and Oasis, although certainly the Bakken area is currently impacted severely by price levels. In any event, whatever the reason, the pullback in the debt market merely exacerbates the problem with equities, and the exodus of income investors bodes poorly for any company that must raise capital to refinance existing debt.
Notable Actions in 2016
Unlike the BOTB Club members, the Sweet Crude Club is not suffering at the hands of their stock exchanges - no de-listings, no non-compliant companies, no companies about to be notified of non-compliance.
Downgrades - The Sweet Crude Club was certainly not immune to downgrades either from sell side analysts or from ratings agencies. However, their downgrades for the most part still left them able to access the capital markets, unlike their BOTB Club brethren. S&P downgraded Apache, Continental, Devon, EOG and Southwestern by one notch, Range and Newfield by 2 notches, QEP and Energen by 3, SM and WPX by 4 and Whiting by 5 notches... In their note, they cited Devon, Range and Anadarko as companies most likely to have to issue equity in 2016, with Continental, Newfield, Noble, Southwestern and WPX also likely.
Dividends - Dividends were cut by Anadarko and eliminated by Energen. Many more cuts are expected in 2016 if prices remain near futures strip pricing.
Capital markets - On the bright side (which did not exist in the BOTB Club), several companies were able to access the capital markets. Diamondback sold 4 mm shares for $226 mm, Oasis sold 34 mm shares for $160 mm and Pioneer sold 12 mm shares for more than $1.2 bln.
Asset Transactions - Concho bought acreage for $360 mm through a combination of cash, common stock and a drilling carry, and sold acreage for $290 mm to a PE firm, Murphy sold midstream assets in British Columbia for C$538 mm and WPX sold its Piceance [CO] properties for $910 mm to a PE firm.
Other - Anadarko brought its Heidelberg Field offshore Gulf of Mexico online, with 2 fields there likely to produce more than 100k bopd, enough to offset almost all of the decline from stripper wells onshore combined; several other large discoveries are likely to be hooked up over the next few years as well due to previously announced and budgeted CAPEX projects. Noble Energy obtained a $1.4 bln term loan to fund the redemption of notes it assumed from its merger with Rosetta in 2015.
Upcoming Press Releases
What should readers look for in upcoming press releases and news reports?
1. BOEs - There is likely no term you will see or hear more than "BOEs", or barrel of oil equivalents. 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. It discusses how BOEs are used in reserve reporting, production, cash flow and many other ways, often with possibly unintended conclusions by investors. That article is, in my opinion anyway, the most important I have written to date, even if it doesn't scream "buy" or "sell" somewhere in it.
Reserve disclosures are a large part science but also a decent part art. One company's PUD reserves, in particular, may be done quite differently than another'. One thing my BOE article points out is that readers must take into account development costs in comparing across companies, while also looking for comparisons to last year's results that may look a bit "askew." I don't think there is any question but that you may only hear price discussed as an explanation for any differences between years, but there will also be performance issues and other matters that may be disclosed less forthrightly.
2. 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.
The distinction between full cost and successful efforts accounting treatment for impairments is critical, especially when comparing across many different companies. That is why I have included a column denoting whether a company uses FC or SE accounting in the table above; there are also several articles on the topics in my profile … all free.
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. S&P was out recently with their notes on downgrades using reduction estimates of 20-30% for borrowing bases in April.
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. Also, even in 2016 estimates do not differ much, the cumulative effect of cutbacks in CAPEX extend for 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. 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 issues can only be reversed by the infusion of additional equity, whether through price increases or stock offerings of some sort. If companies in the Sweet Crude Club lose access to the capital markets, they will definitely suffer even though their suffering would pale in comparison to the BOTB Club.
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 Sweet Crude Club members ahead of earnings. What it should do, however, is serve as a rough industry guide of what to look for. The good news is that they aren't members of the BOTB Club yet, and if some industry predictions of a 50% or greater reduction in the number of companies before this decline cycle is over hold true, they are far likelier to survive than their counterparts there.
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.