While speaking to my father recently, I mentioned that I'd yet to see a significant business go belly-up in the energy sector since the downturn began.
Sure, there were the rumors swirling around Chesapeake Energy
Oilexco, dual-listed in Toronto and London under the enviable ticker OIL, has been the most active E&P in the U.K. North Sea in recent years. Like ATP Oil & Gas
Offshore development requires some serious coin. With the credit clam-up, both ATP and Oilexco have encountered liquidity problems. Through the end of the third quarter, ATP sported higher balance sheet leverage, by far -- so why is Oilexco the one to bite the dust?
Well, just as with your friendly neighborhood investment bank, the stuff that's on the balance sheet only tells part of the story. Turning to the notes that accompany these firms' financial statements, there's a doozy of a differentiating data point.
Under the section "Contractual Obligations," ATP lists $273 million due in less than a year. Oilexco? Nearly $600 million! The largest chunk, at over $250 million, owes to drilling contracts. Two long-term agreements with Transocean
Oilexco had the interesting idea that if it contracted out some rigs for extended exclusive engagements, the firm would control its own destiny. Having weighed itself down with these drilling commitments -- at sky-high dayrates -- this company has done just the opposite.
On a personal note, I'm embarrassed to say that I've often used the debt-to-capitalization ratio as a useful proxy for an E&P's liquidity, without considering off-balance sheet commitments. The case of Oilexco is just one more reminder that diligent Fools need to focus on the fine print.