What happened
Shares of Antero Resources (AR 2.14%), Denbury Resources (DNR), and Whiting Petroleum (WLL) all rallied more than 10% by 2:45 p.m. EST on Thursday. Fueling the surge in these energy stocks was an uptick in the price of oil.
So what
The U.S. oil price benchmark, WTI, rallied about 1% today, closing above $59 a barrel. The primary catalyst was the enthusiasm that the U.S. and China might finally be close to reaching terms on phase one of their trade deal. That agreement should help boost the global economy and demand for crude oil.
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While higher oil prices will benefit the entire sector, financially weaker producers like Antero, Denbury, and Whiting will see the greatest positive impact. All three have too much debt for the current market environment, which has been weighing on their stock prices.
Antero recently unveiled plans to address its financial woes. One aspect was a deal with several of its midstream providers, which agreed to reduce their fees. Antero also plans to sell between $750 million and $1 billion in assets this year to reduce its debt. The company had already been making incremental moves to improve its balance sheet. For example, it recently utilized some of the availability under its credit facility to repurchase $215 million of its bonds at a 17% discount. That move reduced its total debt by $37 million while eliminating $5 million of annualized interest expenses. With oil prices rising, Antero will be able to generate more cash flow that it can use to pay down debt. The higher prices should also boost the value of the assets it plans to sell. That increases the likelihood of the company achieving the high end of its asset sale target range, which would enable it to pay off a much larger portion of its debt.
Denbury Resources has also been working at chipping away at its debt. It has used its free cash flow, as well as its stock, to complete discounted debt repurchases and exchanges. These moves have reduced its total debt by $139 million so far this year. With oil prices rising, it will generate more free cash flow that could help accelerate its debt reduction efforts. Likewise, the improvement in its stock price makes its shares a more attractive option to use in completing additional debt exchanges.
Whiting Petroleum also has an elevated debt level, which the company had hoped to address by selling assets. Analysts, however, worry that this plan would be tough to carry out right now, given the turbulence in the oil and gas market this year. However, the latest boost in oil prices increases the probability that Whiting can deliver on its debt reduction plan.
Now what
Investors have been growing more bullish on the oil market in recent weeks. Not only does it appear that the U.S. and China will resolve their trade issues, but OPEC also announced plans to reduce its production further. Those catalysts could help push crude prices into the $60s next year, which would give financially weaker oil stocks like Antero, Denbury, and Whiting more fuel to help shore up their balance sheets. However, while the outlook for these beaten-down oil stocks has brightened in recent weeks, they remain risky bets.
