Here's Why Highly Levered Oil and Gas Producers Are Getting Hammered Today

What's that saying about when the tide goes out?

Tyler Crowe
Tyler Crowe
Dec 7, 2015 at 3:06PM
Energy, Materials, and Utilities

What: The entire energy sector is down more than 4.5% Monday (as of this writing) following OPEC's decision to not make a decision on Friday. The companies that have really taken it on the chin, though, are highly levered oil and gas producers. Here is just a small sample of companies that have seen their shares decline more than 10% today.

CompanyPrice Change (as of this writing)
Penn West Petroleum (NYSE:PWE) (16.5%)
CONSOL Energy (NYSE:CNX) (13.7%)
Halcon Resources (NYSE:HK) (21.3%)
California Resources Corp (NYSE:CRC) (14.8%)
Oasis Petroleum (NYSE:OAS) (12.8%)
Ultra Petroleum (NASDAQ:UPL)


So what: Late last week, OPEC concluded its most recent meeting without coming to a definitive conclusion about production quotas or an output ceiling for its member states, which appears to be a sign that each of the member states are on their own. The two large concerns about this move are that for one, it creates a bunch of uncertainty in the market, which doesn't exactly instill confidence. The other concern is that companies that have been held back by the quota system will start to raise output, namely Iran. With large swaths of oil potentially hitting the market in the next year or so, it could prolong this lull in oil prices for much, much longer than many anticipated.

The reason that the companies above have taken the news that much harder than others is that their balance sheets are already experiencing strain, with high debt loads and not a whole lot of operational profits to cover the debt (or even interest payments) today.

CompanyNet Debt/EBITDAEBITDA/Interest Expense
Penn West Petroleum  4.28x 3.27x
CONSOL Energy  3.7x 4.86x
Halcon Resources 2.89x 4.99x
California Resources Corp 5.84x 3.48x
Oasis Petroleum 2.84x 6.1x
Ultra Petroleum 4.68x 4.63x

Data source: S&P Capital IQ.

If we were to see an even more prolonged downturn in oil and gas prices, it will put even more stress on these company's balance sheets. That's something that none of them can afford to handle well.

Now what: The market for oil and gas will recover eventually. The natural decline of reservoirs will catch up to the lack of spending that is happening today. With OPEC member countries given what seems to be a free pass to produce what they wish, though, it could take quite some time before that turnaround does happen. So any investor that has an eye on these stocks today needs to be very acutely aware that we are far from the end of the pain in energy stocks, and it would be surprising if some of the companies on this list were able to make it out of this downturn in good shape.