When oil prices started collapsing in mid-2014 from over $100/barrel to under $27/barrel, most oil and natural gas exploration and production companies (E&Ps) were caught over-extended. Debt that previously was easily serviceable, especially with new drilling technologies opening up vast new oil and gas fields in North Dakota, Texas and Appalachia, quickly became unsupportable. Some companies, particularly the larger ones with less leverage, were able to adjust and regain their footing. Others struggled, with over 100 filing for U.S. Bankruptcy Court protection.
While the liability side of these companies' balance sheets was unwieldy, the underlying assets often were still attractive, buoyed by the partial rebound in commodity prices (to around $50/barrel), improved technologies and lower drilling costs resulting from over-capacity at the oilfield service firms. The American bankruptcy process (often referred to as "Chapter 11," which is the applicable section of the bankruptcy law) is designed to release the value of good assets from the shackles of debt. Typically, the company reorganizes by exchanging new equity for much of its debt, either heavily diluting or wiping out the old pre-bankruptcy stockholders.
When companies utilize the Chapter 11 process properly, they can emerge as lean and strong competitors; but many investors shy away from these companies coming out of bankruptcy for a variety of reasons: They don't understand how the bankruptcy process makes the company stronger; their view of the company is tainted by memories of its earlier problems; the stock is not yet covered by Wall Street research and trading can be thin and volatile as former creditors sporadically unload their stock. This often results in the post-bankruptcy stocks being undervalued for some time.
Since the start of 2016, over a dozen energy companies have emerged from bankruptcy as public companies. Knowledgeable distressed investors have not been able to soak up this large supply of new post-bankruptcy stocks, leading to their stock prices being even softer than usual. We think many of these post-reorganization oil and gas stocks look like good bargains right now.
My most recent turnaround investing newsletter highlights several post-Chapter 11 stocks that look particularly attractive, together with a few that narrowly escaped bankruptcy and now offer interesting turnaround potential. Three of those post-bankruptcy stocks are detailed below and further distressed investing opportunities can be found in The Turnaround Letter.
Midstates Petroleum (NYSE:MPO) - Midstates had a brief tour through bankruptcy, entering in April 2016 and emerging in October. The process trimmed over $2 billion of debt, leaving only $128 million, which is partly offset by $77 million in cash. Like other post-Chapter 11 energy producers, Midstates' production is declining. Yet with a solid base of assets in the Mississippi Lime region of Oklahoma, plus decent acreage in the nearby Anadarko Basin, the company is likely to see rising cash flows and production in a year or so. The shares appear deeply discounted, as the company's PV-10 value (a regulatory measure of its oil and gas assets) is nearly twice its stock market value.
Penn Virginia Corporation (NASDAQ:PVAC) - Founded in 1882, Penn Virginia filed for bankruptcy in May 2016 and emerged four months later with a clean balance sheet (currently only $30 million of debt), a new board, new senior management, a new home (relocated to Houston from Pennsylvania) and a tightly focused asset base primarily in the Eagle Ford oil fields of southeastern Texas. Production will continue to decline for a few more quarters, with an upturn likely in late 2017 or early 2018. Valuation is attractive, as proved reserves are worth about $32 per share, nearly 75% of the current share price, giving little credit for future growth.
SandRidge Energy (NYSE:SD) - SandRidge was formed in 2006 by Chesapeake Energy's co-founder and CFO Tom Ward, who hoped to replicate Chesapeake's aggressive debt-financed growth. He was forced out in 2013, but the company continued to struggle under his legacy of debt. Through a brief but cleansing stint in bankruptcy in 2016, SandRidge was able to eliminate $3.7 billion of debt so that it emerged with $174 million in cash and only $36 million of debt. Shares are cheap, trading at only the value of its proven reserves and giving no credit to its cash balance, other acreage or future prospects.
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. I have no business relationship with any company whose stock is mentioned in this article.
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