Opportunity and Risk in the Oil Patch
Guest post by Philip Van Deusen, Director of Research, Tigress Financial
Oil’s decline has become the topic of conversation on the street; from Saudi price fixing to Bakken break-even, oil has dominated the recent market narrative. We wanted to highlight some interesting data pertaining to oil and companies in the E&P sector.
Tigress Financial Partners has been bearish on the price of oil this year and we have been predicting the recent breach of the 2012 lows in our Morning Report. This week WTI broke the 79 level set in 2012 but it looks like WTI has found support after a nearly 30% decline from June’s highs. Also of note is what normally would have been negative headlines for WTI out of Europe on the economic front and Saudi pricing to the U.S. did not have the expected impact on WTI, perhaps oil is finding a bottom.
Shares of Bakken-centric producers have taken big hits since oil peaked in June on the premise that their cost to get oil out of the ground is higher than other US regions. In our view some of the selling has been the old proverbial throwing the baby out with the bath water and we believe there are opportunities to get long some of these high quality Bakken plays. HES (Buy-Rated) and WLL(Buy-Rated) are two of our top picks in the space. Both have low levels of debt compared to many E&P companies and significant proven reserves in the play.
One area of concern for us is the impact of lower oil prices in high yield debt market. Lower oil prices portend lower margins and thus less cash flow for debt servicing. A lot of issuance in the high yield debt market has gone to funding E&P companies as demonstrated by the Oil & Gas 14 % composition in the HYG - iShares High Yield ETF, only slightly behind the Utility Sector. For now there does not appear to be too much disturbance in the junk market but we would be wary owning shares of E&P companies with high levels of DEBT/EBITDAR and DEBT/Total Capital, relative to peers.