That is to say, everybody's got a couple.
This week, companies ranging from Apache
Apache, Talisman, and Statoil struck different notes on the matter of mergers and acquisitions. Statoil says it's sticking to developing its resource base, which now includes a large position in Appalachia, thanks to a tie-up with Chesapeake Energy
Apache specifically cited a situation that may put companies and assets "in play."
There's a little something called a ceiling test, in which year-end reserve values are compared to carrying costs. A non-cash writedown results if price-driven reserve revisions are large enough. Apache anticipates taking a charge, but has yet to quantify it. W&T Offshore
Why would these impairments lead to M&A opportunities? In the worst case, a charge could break covenants with lenders or reduce borrowing power. W&T says it's immune from such effects, but other explorers, particularly small ones, could be vulnerable. Companies that are overleveraged and testing their lenders' patience are particularly at risk.
If you're invested in a well-financed operator like Apache or W&T, you have nothing to worry about. If you're hanging on to a company whose balance sheet is more stretched, I know you've seen the share price collapse, and may hold the notion that things can't get any worse. I'd suggest that they can.
Stick with the strong ones, Fool. Death has already come to the oil patch in 2009, and there are more bodies yet to drop.
Chesapeake Energy is an Inside Value selection. W&T Offshore is a Motley Fool Hidden Gems recommendation. StatoilHydro is an Income Investor pick. Explore any of our Foolish newsletters free for 30 days.