With oil and gas prices continually challenging their multi-year lows, many of the companies that were making their hay as part of the American oil and gas renaissance now find themselves on the brink of collapsing under weight of bloated balance sheets. Since crude oil prices started to decline a little over 18 months ago, more than 40 companies in the oil patch have filed for chapter 11 bankruptcy protection. Of those that remain, a few look like they will either:
- A) fall victim to their creditors, or;
- B) absolutely soar if oil prices recover ever so slightly.
We asked three of our energy contributors to highlight a stock in the energy space that looks like a real all-or-nothing bet. Here's what they had to say.
Jason Hall: Ultra Petroleum (UPL) is one of the few independent producers that I've actively invested in over the past few years, and largely because the company -- which focuses mainly on natural gas production -- operates some of the lowest-cost production in the industry. Unfortunately, the company took on a massive amount of debt to expand its low-cost production in the Pinedale play, and that move could be the company's undoing, because its debt costs are a real issue.
The good news? The company is able to generate positive cash flows from a lot of its production, and has continually improved on its field operations, reducing the amount of time and the cost to produce new wells in the past few years, and that will certainly help. The company reported "all-in" costs of $3.16 per Mcf (1,000 cubic feet) in the third quarter, while realizing natural gas prices of $3.33 per Mcf. But that's where the good news starts to dry up.
Ultra's realized prices over the past several quarters have been higher than wholesale spot prices, due to a strong hedging program. Unfortunately, the recent downturn in natural gas prices has been nearly as bad as the decline in oil, and the company is heading into 2016 without the benefit of the strong hedges from prior years. Ultra reports earnings on Thursday, and should still get the benefit of hedging on realized prices in the fourth quarter.
But looking forward, Ultra's survival is probably tied to higher gas prices. Natural gas is trading around $2 per Mcf right now as an unseasonably warm winter reduces demand for gas for heating. If demand doesn't pick up soon, Ultra may run out of time. However, gas prices can change very sharply, and very quickly. If that happens, the game may not be over for this low-cost producer.
Chesapeake Energy's bankruptcy risks are real, and they're a big reason why the stock is down 90% over the past year. The company has a mountain of debt that it has been having trouble addressing during the downturn. Times are so tough that the company was unable to complete a debt exchange to push back its near-term maturities. Instead, it primarily bought back longer dated maturities at a discount. That failure is forcing it to look at other options to address those bond maturities.
That said, the company does have the resources to pay off $500 million in debt it has maturing in March. Further, it's considering assets sales to address the more than $1 billion in debt that's coming due next year. If it can arrange deals for those assets at something better than fire sale prices, and if commodity prices begin to rebound, then Chesapeake Energy has a good chance of pulling through this downturn.
Bottom line, Chesapeake Energy's future is binary. Either it finds a way to address its balance sheet woes and looming debt maturities outside of bankruptcy, or it doesn't. The big unknown is really what commodity prices will do. If we see a strong rebound in prices over the next few months, that would really help Chesapeake's case because it would not only improve its cash flow, but also the value of the assets it is hoping to sell.
Tyler Crowe: Surprise! another company that is in the same predicament as Ultra Petroleum and Chesapeake Energy is fellow exploration and production company Denbury Resources (DNR). Ever since oil prices started to roll over, shares of Denbury have been hit particularly hard. Unlike the other two companies mentioned, though, almost all of its production comes from crude oil rather than natural gas.
Like Ultra Petroleum, Denbury has had a decent portion of its production hedged in 2015. Thanks to its strong hedges, the company's average realized price last quarter was an incredible $71 per barrel. As we head into 2016, though, many of those hedging positions will be used up, exposing the company to today's crude prices of around $30 per barrel. Since most of its production comes from enhanced oil recovery techniques that repressurize mature oil fields with CO2, it has a higher production cost per barrel than most other companies. When Denbury reports earnings on Thursday, we will start seeing some of the effect of more of its production being exposed to current oil prices
Compared to Chesapeake and Ultra, though, Denbury isn't under much financial strain. That isn't saying much, though, because once those hedges roll off, the company could see a pretty drastic decline in its earnings, and in its power to pay off debt.
If we were to experience a decent uptick in oil prices in the coming months -- and if that happens before the company's entire production portfolio is completely exposed to spot prices -- then we could see a decent uptick in Denbury's shares. If not, then Denbury could find itself behind the 8-ball of a deteriorating balance sheet, just like its peers.