Oil prices imploded earlier this year, which has decimated many oil stocks. Things have gotten so bad that several have already declared bankruptcy. That trend is likely to continue in the coming months.
The list of at-risk oil stocks seems to be growing by the day as companies update the market on their deteriorating credit profiles. Four that seem to be likely bankruptcy candidates this year are Borr Drilling (NYSE:BORR), California Resources (OTC:CRC), Denbury Resources (NYSE:DNR), and Oasis Petroleum (NYSE:OAS).
Double the bad news
John Bromels (Borr Drilling): Offshore rig operator Borr Drilling just released a Q1 financial update and a fleet status report on May 20, and neither one was pretty.
Of the 30 drillships in the company's fleet at the end of 2019, four have been sold. Another three received early termination notices in May, joining 11 other ships in "stacked" (idle) status. That means that of the company's now-26-ship active fleet, more than half (14) are neither generating revenue nor under contract to do so in the future.
With $1.8 billion in debt on its books and just $13.2 million in cash, the company is facing a liquidity crisis. In its update, Borr announced it was involved in a "tender processes which might lead to sale of certain modern assets," was negotiating "postponement of certain yard commitments, adjustment in covenants and reduced [amortization] as well as deferring cash interest payments" with creditors and shipyards, and has "received certain waivers from its lenders, including ... interest payment deferrals." On top of that, it reported a Q1 net loss of $87 million.
Basically, Borr is scrambling to stay afloat (no pun intended) by any means it can, whether that's selling its rigs or renegotiating the terms of its credit. But if the sales don't go through or lenders refuse to extend more generous terms, Borr may have no choice but to declare bankruptcy.
Management has told you as much
Tyler Crowe (Denbury Resources): Typically, predicting that a company is about to go bankrupt involves making some assumptions about the future. In Denbury Resources' case, management has taken out a lot of that guesswork. In the company's most recent quarterly report on May 18, management pretty much spelled out that it will struggle to meet the covenants it needs to preserve its credit facilities, and it has struggled to refinance much of its debt that will come due in 2021. In management's words: "There can be no assurances that the company will be able to successfully restructure its indebtedness, improve its financial position, or complete any strategic transaction." In addition, the company has said it has engaged consultants to look at financing alternatives.
Denbury's business is unique. Instead of drilling for new sources, it injects CO2 into older reservoirs to squeeze the remaining out. There are some advantages to this kind of oil business -- low decline rates and almost non-existent exploratory expenses -- but the per barrel operational costs are rather high. According to its most recent investor presentation, Denbury had total per-barrel expenses of $46.31. With costs that high, every barrel of oil produced means more cash out the door than in. Sure, the company says it's been able to lock in higher oil prices for some production using futures contracts. But even when you add those contracts to the mix, management still doesn't think it will be able to make it.
Don't take it from me -- take it from Denbury's management.
The dozen words you don't want to ever hear
Jason Hall (California Resources Corp.): Like plenty of other oil producers, California Resources started 2020 with its share of problems. The biggest problem was a mountain of debt, approaching $5 billion, with less than $20 million in cash and very limited liquidity beyond that.
That's not how you'd want to enter the worst oil market downturn in history.
Things have only gotten worse. The quick deterioration of the oil market forced the company to terminate a offer to exchange about $1 billion in debt in March, leaving it in an even weaker financial position just as global demand and crude prices cratered.
As a result of this massive shock, California Resources is quickly running out of money and has had to take drastic steps, including shutting in about 5,000 barrels per day of existing production, to slow the bleeding. The company has delayed filing its first-quarter financial results with the SEC until sometime in June, and in a recent SEC filing, it gave investors a dire warning: "In the event the company is not successful in
restructuring its balance sheet, there is substantial doubt about the company's ability to continue as a going concern." (Emphasis mine.)
There's a chance its lenders play ball, but a protracted oil downturn isn't in the company's -- or its shareholders' -- favor.
The noose is tightening
Matt DiLallo (Oasis Petroleum): Cratering crude prices have walloped North Dakota's Bakken shale region. One of the region's largest producers, Whiting Petroleum, has declared bankruptcy, while another leader, Continental Resources, had to shut in nearly all its wells because they were losing money. The region's struggles don't bode well for smaller producers like Oasis Petroleum, especially considering its tightening credit profile.
Because lower oil prices have affected the value of its reserves, Oasis' banks recently slashed the amount of credit they're willing to extend the company from $1.3 billion to $625 million. It already borrowed $487 million on that facility, leaving it with little margin for error.
On top of that, Oasis has more than $1.8 billion of senior notes outstanding, roughly $800 million of which mature in 2022. Given its tight credit profile and junk-rated credit, the company likely won't be able to refinance that debt.
On a positive note, Oasis does have $110 million in cash and a strong oil hedging program, enabling it to produce free cash flow at current oil pricing. It intends to use all that money to repay debt in hopes of staying afloat. However, if oil prices remain weak, and the company doesn't make enough progress on its debt reduction goal, its banks might cut its borrowing base again this fall. That would likely force it to declare bankruptcy so it can restructure its debt.