There are probably hundreds of solid stocks out there that are worth owning for the long-term. Unfortunately, there are probably hundreds more that just should be avoided entirely due to weaker market positions, financial strain, or really cloudy futures. Among that latter group are three in particular that I'd steer clear of right now: Vanguard Natural Resources (NASDAQ: VNR), Seadrill (SDRL), and Chesapeake Energy (CHKA.Q). Here's why.
Vanguard Natural Resources has a very big problem that it needs to address. The company relied too heavily on its credit facility when oil and gas prices were higher and now it's stretched pretty thin. In fact, as of early March it had borrowed 94% of the credit available on its reserved-based credit facility. That's a big problem because its banks can redetermine that facility twice a year, with the next redetermination coming this spring. The concern is that with oil prices even weaker now its banks could potentially cut its available credit below its outstanding borrowings, which would force the company to repay the deficiency in six equal monthly installments.
Vanguard Natural Resources has tried to get out ahead of this by suspending shareholder distributions and selling assets. Its hope is that it will have enough cash and cash flow this year to keep its head above water until oil and gas prices improve. However, with the bulk of its hedges rolling off next year, it could be in even more trouble next year if oil doesn't improve, which is why investors are best to avoid Vanguard for now.
No upside until 2018
Seadrill is in a somewhat similar position in that it has a boatload of bank debt. It recently hired advisors to help it restructure the $11 billion in loans and bonds it has outstanding, of which $8.4 billion are bank facilities. Of the greatest near-term concern is the $3.5 billion in debt that's due by the end of next year, which is going to be nearly impossible to refinance given the currently weak market conditions in the offshore drilling sector.
It's a sector that Seadrill's own CEO Per Wullf doesn't see improving until at least the end of 2017, and that's if oil prices cooperate and rebound well before that time. Given the company's debt issues and the fact that the offshore market might not improve from another two years, investors are better off steering clear of Seadrill's stock for now.
Hanging by a thread
In a recurring theme, Chesapeake Energy is also weighed down by debt, with the company owing $9.5 billion to creditors. Like the other two on this list, the company has a substantial near-term debt overhang that needs to be addressed, with the company looking at a potential 1.5 lien debt exchange to push back these looming maturities after failing in its attempt to address those maturities with a second lien exchange a couple of months ago.
Having said that, the company did recently get a big shot in the arm after its banks reaffirmed its $4 billion credit facility, which unlike Vanguard Natural Resources it had yet to tap. That gives it a lot of liquidity to address its debt maturities and buys it some time to sell assets, with it potentially joining Vanguard in selling its STACK assets. Still, the company has a lot of debt to address before it's back on solid ground, which is why Chesapeake should be avoided right now.
All three companies have too much debt for current commodity prices and industry conditions. It's debt that could potentially sink all three if it's not addressed and conditions worsen. There are just better options available that have the compelling upside if conditions improve, without the downside of a bankruptcy if they don't.