(Photo: Sergio Flores)
The oil market has seen a near-term implosion because of the coronavirus or Covid-19 downturn. The pandemic has triggered an unprecedented decline in oil and gas demand putting financial pressure of the sort the industry hasn't seen in crises past.
Global proxy oil benchmark Brent, albeit up in recent sessions, is trading down nearly 55% since the start of the year while the West Texas Intermediate is down 57% having fallen into a bizarre historic first of negative prices on April 20, 2020 – a date that has acquired commodity trading infamy.
Of course, the momentary slump into negative territory was down to paper traders dumping their positions in an expiring WTI May contract but the kerfuffle just about summed up the dire market sentiment.
Subsequent first quarter earnings of oil and gas majors mirrored it as well, with the 20 biggest international oil companies by market capitalization announcing an average 30% reduction on their previous year's budget and spending curtailments in excess of $60 billion on the back of massive drops in earnings.
It has been an uphill struggle for smaller players with several bankruptcies, and listed companies haven't been immune either with Diamond Offshore
In my opinion, the following three stocks appear most vulnerable in descending order of market capitalization:
1. Merger Horror: Occidental Petroleum (NYSE:OXY)
Once a rising power-broker of the U.S. oil patch - Occidental Petroleum is now in the doldrums with a junk rating, beholden to Warren Buffett, groaning under the weight of its own debt and the subject of activist investor Carl Icahn's ire. And practically all of it is down to hubris and a perfectly avoidable, ill-timed and ill-fated merger.
That's because the company's Chief Executive Officer Vicki Hollub wanted Anadarko Petroleum last year, a company that Chevron
As fate would have it, the coronavirus pandemic crashed the oil price while the acquisition has saddled Occidental with massive debts of $35 billion that it is currently struggling to service. A way out – via higher oil prices in the region of $50 per barrel – appear remote over 2020, and its management's fuzzy hedging strategy has left it exposed to oil prices lurking below that threshold.
Even if oil demand starts to meaningfully rise in July, predicated on the global community getting a handle of the coronavirus pandemic, there would an inventory glut to cope with.
Along with its peers, Occidental is shuttering wells. In fact, between it, Chevron and ConocoPhillips
Ironically, Chevron was once willing to pay $33 billion for Anadarko alone, and could swoop for an Occidental that has absorbed Anadarko, for $13 billion! Such has been the run on the company's shares, currently down 80% since April 11, 2019 - the eve before Hollub's aggressive intent for Anadarko became apparent.
Should Occidental file for bankruptcy, it would probably be the highest profile casualty of the downturn in 2020. The risk remains and the company or what's left of it might be rich pickings for a cash-rich Chevron.
2. Cashless one-trick pony: Callon Petroleum (NYSE:CPE)
At a time of market upheaval of historic proportions even firms with diversified portfolios are struggling. Spare a thought then for Callon Petroleum, which can only be described as a cashless one-trick pony. Quite like Vicki Hollub and Occidental, Callon's misery began with another case of an ill-timed and ill-fated merger, albeit of a slightly lower petrodollar valuation, driven by its own boss Joe Gatto.
The company was already a pure Texas shale acreage operator. Then in December 2019, it became an even purer Texan outfit by acquiring its state peer and fellow shale operator Carrizo Oil and Gas Inc, and took on its target's $1.7 billion debt. That bumped the combined entity's total long-term debt to $3.2 billion.
The total comes to over four times trailing EBITDA and leaves Callon holding acreage that is not quite worth what it paid for before the coronavirus pandemic pummeled the market. Much of Callon's debt burden does not mature until 2023. But with just over $13 million in cash on hand in the current climate, rating agencies are quite spooked.
As a result, Callon not only has a junk status from agencies but Moody's
3. Repayment dilemma: Chesapeake Energy (NYSE:CHK)
It is perhaps not a case of 'if' but probably 'when' for Chesapeake Energy, and that day could come as soon as July 1, 2020. That's because the company has a debt repayment of around $140 million it looks incapable of honoring around the time, barring last minute surprises.
If it doesn't happen in July down to some minor market miracle, there is always a possibility later down the year. Chesapeake's debt currently stands at approximately $9 billion, and just under $300 million – including the July 1 tranche payment – matures this year. In earlier investor calls, Chesapeake said it wants to service the debt by selling half a billion dollars worth of "non-core" assets.
That is unlikely to happen with the coronavirus downturn knocking asset prices to near-term lows, and at the very least stripping Chesapeake of the opportunity to monetize them more effectively.
Unsurprisingly, rumors of the company hiring restructuring advisers are rife. I have even stopped describing it as a strong sell, since my price target for it is zero. Given the amount of debt it has outstanding and the coronavirus saddled oil market it operates in, expect total destruction of common share value in the event of a bankruptcy.
Disclaimer: The above commentary is meant to stimulate discussion based on the author’s opinion and analysis. It is not solicitation, recommendation or investment advice to trade oil and gas stocks, futures, options or products. Oil and gas markets, and the businesses operating within it, can be highly volatile so opinions in the sector may change instantaneously and without notice.