What happened
Crude oil continued its ascent on Monday, building on last week's OPEC fueled gains. The U.S. oil benchmark price, WTI, spiked 3.1% to close at more than $57 a barrel, with the nearly $2-a-barrel gain the highest dollar basis price increase in almost a year. Fueling today's rally was news that Saudi Arabia detained several officials and members of the royal family over the weekend.
The market saw the detentions, which the kingdom made in an anti-corruption crackdown, as a move by recently installed Crown Price Mohammad bin Salman to consolidate his power. Given that he remains firmly committed to OPEC's current policy to support oil prices, the market saw the news as bullish for oil since it increases the likelihood that Saudi Arabia will continue to work to end the oil glut, which could drive prices even higher.
Image source: Getty Images.
So what
Higher oil prices are just what deeply indebted North American producers Chesapeake Energy (CHKA.Q), Baytex Energy (BTE -1.09%), Denbury Resources (DNR), and California Resources (CRC) need to help ease their financial burdens. That's why all jumped more than 10% today.
Leading the way was California Resources, which was up 18.6% at 3:45 p.m. EST on Monday. The California-focused oil company currently has one of the highest leverage ratios in the industry despite reducing debt by nearly $1.6 billion since the second quarter of 2015. Because of its elevated leverage, California Resources is barely generating enough money to make ends meet. However, as crude prices rise, so will cash flow, which would give the company additional money to whittle down debt.
Canadian oil producer Baytex Energy also has a mountain of debt on its balance sheet, though it doesn't have any maturing until 2021 so it has time to address the situation. While it has worked on paying down debt over the past few years, it has been a slow process since the company can't generate much excess cash when oil is below $55 a barrel. However, if crude stays above that key level thanks to Saudi Arabia, then Baytex Energy's free cash flow would surge, giving it more money to chip away at debt. That's why the stock was up more than 10% by 3:45 p.m. EST on Monday.
Denbury Resources, meanwhile, jumped more than 15% by late afternoon on Monday for the same reason. The oil producer noted last quarter that it has borrowed $490 million of the $1.05 billion available under its credit facility, which was a $189 million increase since the start of the year. While an acquisition and the repayment of some nonbank debt contributed to the rise, Denbury wasn't generating enough cash flow when oil was in the $40s early this year to make ends meet. The company, however, noted that borrowings would fall to $425 million to $475 million by year-end if crude remained in the upper $40s. However, with crude heading to the high $50s, Denbury should generate significantly more cash flow, which positions the company to pay off even more debt by year-end.
Finally, Chesapeake Energy also spiked double digits thanks to today's rally in the oil market. Driving the stock's surge is the view that higher oil prices will enable Chesapeake to generate more cash so it can quickly pay down its $9 billion debt pile, which currently puts it at a significant disadvantage to financially stronger peers. While Chesapeake Energy has been selling assets to address the situation, higher oil prices would boost cash flow as well as potentially increase the value of its assets, so it could fetch higher sales prices when it sells them in the future, which would help accelerate its debt reduction efforts.
Now what
The mood in the oil market has shifted over the past few months, thanks in part to Saudi Arabia's staunch support of the efforts to end the market's glut by holding back its production. As a result, oil prices could continue rallying, which would likely take this group of beaten-down oil stocks up with it. That said, these companies remain risky bets, which is why investors should still steer clear of them for the time being and instead consider oil stocks that are already built to thrive in the current oil market.
