Friday, July 24, 2015
The bad news in the oil sector just keeps coming...
Last week, energy producer Sabine Oil and Gas filed for Chapter 11 protection in U.S. Bankruptcy Court in New York City. The company has $2.9 billion in liabilities (of which $2.8 billion is debt) and only $2.5 billion in assets. It's the fifth-largest bankruptcy in the U.S. this year.
But Sabine is just one of seven oil and gas producers that have filed for bankruptcy in 2015.
And this is just the beginning...
With the price of benchmark West Texas Intermediate crude oil down 53% from its mid-June high – to around $50 per barrel – it's now impossible for most oil producers to earn profits on new oil production.
You see, between 2003 and 2011, the price of crude oil rose from about $20 per barrel to more than $100 per barrel. At that price, expensive oil all over the world became economic – miles deep under the ocean, under the frozen seas of the Arctic, and even trapped in shale rock.
Areas like south Texas' Eagle Ford Shale and North Dakota's Bakken Shale exploded in growth. Producers, including Sabine, borrowed money to start drilling in these areas.
Now, with today's low oil prices, many of these companies have high levels of debt that they can't pay back.
That was the case with the other companies that filed for Chapter 11 bankruptcy protection this year... Quicksilver Resources, Saratoga Resources, BPZ Resources, Dune Energy, American Eagle Energy, and Milagro Oil and Gas.
Selling assets, reducing capital expenditures, and cutting jobs wasn't enough to keep these companies viable. So they've been forced to declare bankruptcy this year.
After bankruptcies like these, a company may work with its lenders to restructure its balance sheet. The lenders may agree to waive a portion of the outstanding debt in exchange for some of the stock of the new company. So the new company will owe less money to its creditors and have more financial flexibility.
Other times, a company has to sell its assets to repay its debts. In this case, the buyer may be able to get the asset at a below-market price because assets of bankrupt companies are often not as desired as those of operating ones.
For example, Dune Energy, is in the process of selling its operating assets. Last week, the judge approved the $19 million sale of most of the company's assets to White Marlin Oil and Gas. Dune listed all of its assets on its books for nearly $200 million. So White Marlin got a fantastic deal.
We'll likely see many more of these deals over the next year... As long as oil prices remain low, producers will continue to struggle. And those with high levels of debt may be forced into bankruptcy.
But that's good news for resource investors...
You see, for the sector to recover, struggling producers have to leave. Bankruptcies will help cleanse the market of higher-cost assets... or put them in the hands of more productive operators. So the companies left will be more efficient... and able to focus on rewarding shareholders. This means investors will have better options to choose from. And we'll see a bottom in these stocks.
We still need to see more producers leave the sector before this happens, though. We'll be keeping a close eye on it over the next year.
"If you want to invest in the oil sector, conventional wisdom says Big Oil stocks like ExxonMobil, Chevron, and Royal Dutch Shell are the best way to do it," Brian writes. But buying these "safe" oil stocks is riskier than you think. Get all the details here.
Brian says setting yourself up to profit from natural resources starts with one simple rule... respecting the trend. Learn how to start using the trend to profit – and avoid losses – in resource investing right here.
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