Most energy companies had a rough past 18 months, and 2016 doesn't seem to show any signs of changing that trend. But even during a sectorwide downturn, some companies still stand out for their exceptionally bad performance.
In this video segment, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about three companies that are looking at especially rough waters right now, and why they're having such a particularly difficult time.
A transcript follows the video.
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This podcast was recorded on Feb. 25, 2016.
Sean O'Reilly: Who got particularly pummeled in the last couple of months? Who did so badly that they stand out and probably deserve to go bankrupt? Or something. Who goes first?
Tyler Crowe: I hate saying that somebody deserves to go bankrupt. It's just --
O'Reilly: Nobody deserves to go bankrupt.
Crowe: It sounds so, so harsh.
Taylor Muckerman: Well, some people deserve to go bankrupt!
O'Reilly: (laughs)
Crowe: Taylor's a little harsh.
O'Reilly: If you believe what Saudi Arabia said the other day, it was like -- what did he say at that conference? He was in Houston, he was like --
Crowe: He said, lower costs or --
O'Reilly: Or leave.
Crowe: -- get out. Yeah, basically.
O'Reilly: Thank you so much for that sound economic principle. Anyways. Alright, who's up first?
Crowe: I guess I'll start. One company that did really ... it's been kind of one that we've talked about in The Motley Fool universe for a while. I know it was a Motley Fool recommendation --
Muckerman: Yeah, a while ago.
Crowe: -- for a little while, it's Ultra Petroleum (UPL).
O'Reilly: They're nat gas mostly.
Muckerman: Don't let the name fool you.
O'Reilly: Don't let the name fool you, yeah.
Crowe: They're nat gas, yeah. Mostly involved in what's called the Pinedale Powder River Basin area up in Wyoming. It's a very low-cost, low-decline, kind of conventional natural gas area.
O'Reilly: Well, this is why they were a Fool pick. They were the lowest-cost natural gas producer.
Muckerman: It sounds like a country club, Pinedale.
O'Reilly: Yeah. (laughs)
Crowe: But the reason that they have struggled so much is that they were leveraged out the nose. They just had a debt load that was, even 3 or 4 years ago, looking unsustainable. Even when gas prices were doing pretty well, everyone was like, "You know, you guys have a pretty high amount of debt on the balance sheet, what are you going to do about that?" And as we've seen over the past, I think actually, this was a quote for management that basically gives you an idea of what's happened. He says, "We had net debt of about $3.4 billion, which has been fairly consistent since 2014. However, we have had EBITDA of approximately $800 million in 2014, $600 million in 2015, and forecast $300 million in 2016."
O'Reilly: (shuddering) Oooh!
Crowe: So, basically, they're saying that, "We're kind of losing it."
O'Reilly: Off the top of your head, do you know what their cost is? Because nat gas is at $2 or something. Do any numbers come to mind?
Crowe: They're right around there, actually. Here is the issue, though, is, we've talked about them being the lowest cost, lowest cost, lowest cost. Which is great. Here's the other problem with it: it's all the way up in the mountains of Wyoming.
O'Reilly: (laughs)
Crowe: And because of that, and all of those gas hubs like the Barnett Shale in East Texas, and you've got Anadarko basin right in Oklahoma, those are much closer to the demand sources, so the transportation costs down at the Gulf Coast, where most of our natural gas is consumed --
O'Reilly: Every pipeline winds up in Houston, so yeah.
Crowe: -- it's a lot less expensive. So the differential price that Ultra Petroleum is going to get because of that high transportation cost, their realized cost for actually selling it, or realized price, is already baked in lower. So you can say that you're the low-cost producer, but then you also have to accept the fact that you're not going to get as robust of prices as everybody else.
O'Reilly: Got it. Man. Alright, Taylor, who had an unfairly rough last couple months?
Muckerman: I don't think they're going to go bankrupt. I'll go ahead and prequel my --
O'Reilly: Is Ultra bankrupt?
Crowe: No, not yet. But they're talking about restructuring.
O'Reilly: Okay.
Muckerman: They're talking bankruptcy as an option.
Crowe: There was a lot of talk on the conference call about --
O'Reilly: Strategic alternatives. (laughs)
Crowe: Strategic alternatives and negotiating with their creditors.
O'Reilly: "I'm going to make it ... " Anyways. (laughs)
Muckerman: Marathon Oil (MRO 0.76%). According to MarketWatch, first time in 20 years that it failed to turn a profit. So, not that great for the full year of 2015.
O'Reilly: No, because a lot of the other big name oil companies are still profitable.
Muckerman: They're still profitable based on their metrics, yeah. They're also cutting spending this year, 2016, by a little over 50%. So, they're still feeling the pain. Cutting workforce by 20%. But the big thing here is that, of that money that they're spending in 2016, 70% is going toward shale. So they're leaving very little room to spend on long-tail projects, which is going to be the growth that you're going to see in 5 to 10 years. So, I think, they're short-changing themselves by spending all this money on -- well, because they need to, they need these upfront cash flows in order to sustain capital, because they're already spending more than double their cash flow under capital expenditures in 2015.
They're expected to spend more than they're going to bring in in 2016. So they need these immediate cash flows. And that's unfortunate, because in 5 to 10 years, what are shareholders going to have to hold on to? They're not going to continue to drive huge growth from shale for 15 more years. They're going to need these deepwater projects, they're going to need these projects that don't require fracking and CO2 injections and waterflooding. They need big projects, and they're not spending on it right now.
Crowe: It's kind of interesting, because ConocoPhillips did the exact same thing when they announced their earnings a little while ago, they are moving very far away from their deepwater exploration and deepwater development projects --
O'Reilly: Those are the low-cost long-tail things you kind of want.
Crowe: I wouldn't say deepwater is necessarily lower cost ...
O'Reilly: Well, it's big upfront costs, but later down the line ...
Crowe: Right. You've lowered your decline rates, so you ...
Muckerman: You lower your production per barrel.
Crowe: So you have a more consistent cash flow.
O'Reilly: What's the decline? It's 2-3% on those things.
Crowe: A little higher than that.
O'Reilly: Okay.
Muckerman: But it's not 70%.
Crowe: It's not shale.
O'Reilly: Cool. So, my company is not an oil-related company at all, but it is your friend and mine, SolarCity (SCTY.DL).
Crowe: Yeah, I think the two of us are going to look at you very attentively here, because you have two shareholders in SolarCity looking at you --
Muckerman: (groans loudly)
O'Reilly: I swear, I did not do this just to ...
Muckerman: "Doom and gloom!"
Crowe: He's doing it just to troll.
O'Reilly: I'm sorry. Anyways, you guys know full well, I just couldn't believe that this happened. But basically, I'm referring to the Nevada ruling that changes the rules for net metering within the state. It basically made rooftop solar un-economic, and they did it retroactively. As I understand it, this is not a permanent decision, could get changed in the future. SolarCity obviously just bet the wrong way on this. And (laughs) they just did not need this right now.
Crowe: I mean, not only did they ... I wouldn't say bet the wrong way, but, the minute that ...
O'Reilly: The ruling came out.
Crowe: The ruling came out, they basically fired everybody.
O'Reilly: It's like, "Alright, we're leaving!" (laughs)
Crowe: I mean, that's it, they left.
O'Reilly: When I heard that, I was just like, "Wow, this is really a big deal."
Muckerman: Well, it shows you that they're nimble, right?
Crowe: Right. (laughs)
O'Reilly: If there's a state in the United States of America that's perfect for solar ... (laughs) it's them and Florida.
Muckerman: You would imagine.
