#$sgy

[deadcompanieswalking]

The Oil Rally Won’t Save These Companies

Ever since oil cratered to $26/barrel on February 11th, prices have steadily inched higher. West Texas Intermediate has now climbed into the $40/barrel range. Not surprisingly, energy stocks have kept pace, with many service companies and independent producers hitting year-to-date highs. Unfortunately for some energy firms, however, this recovery will probably be too little, too late.

Unlike other sectors, it is pretty easy to identify which energy companies will survive and which will likely file for bankruptcy. Because many energy firms have public debt, bond prices and bond yields can be extremely useful predictors of a company’s future stock price. The higher the yields, the stronger the likelihood a business is heading toward bankruptcy. Once bond yields surpass 50 percent, the chances of a default and reorganization approach near certainty.  

Today there are a handful of energy companies with bonds yielding 50 percent or more. This includes Basic Energy (BAS), Gastar (GST), Energy 21 (EXXI), Exco Resources (XCO), Stone Energy (SGY), and W&T Offshore (WTI). Others, like Ultra Petroleum (UPL) and Linn Energy (LINE) have already missed interest payments on their debt, which is almost always a precursor to a bankruptcy filing and a zeroed out stock price.  

The reason bond yields are such reliable indicators of financial distress is quite simple: buyers and sellers of corporate debt are not speculative day traders betting on long shots. They are mostly sophisticated, accounting-savvy institutional investors and hedge funds. They have to do be right more than they are wrong or they lose their jobs.

Conversely, investors in low priced stocks – especially retail investors – are often far less rigorous in their research and investing approach. Proof of this fact can be seen in the recent performance of the eight stocks I listed above. Despite the staggering yields on their bonds, almost all of them have seen their stock prices rally in recent weeks.

After three decades in money management I increasingly doubt whether John Q Public understands the implications of a Chapter 11 filing. I also wonder if senior managements (and their cheerleaders on Wall Street) instill a misguided fear of bankruptcy in workers and politicians. Why? Because financial elites know that bankruptcy always wipes out a stock price and hurts bond prices, as well. They also know that while bankruptcy reorganization rarely causes the widespread loss of jobs, it devastates the net worth of senior management, large investors, and sometimes Board members. In their eyes not all stakeholders are created equal.  

The lesson is clear: before buying an energy company stock with public debt, investors should look at the yield and yield-to-maturity on that company’s bonds. If the yields are gigantic, bond investors are pricing a bankruptcy and reorganization into those bond prices. That means the stock price is probably going to zero, possibly within a few months. Unless oil prices rally quickly back to toward $90 or more, every energy stock mentioned above will almost certainly finish 2016 at or near zero.

[thedealnewsroom]

Three offshore oil and gas drillers ready to be plucked from the storm

If Shell's $70 billion purchase of BG Group reignites interest in the battered sector, Energy XXI, W&T Offshore and Stone Energy will attract most of the attention.

by Claire Poole

Oil and gas explorers and producers that work on the land have it easy: They can move in and out of wells quickly when prices fall or when they find better prospects elsewhere.

Offshore operators aren't as lucky. They have to build a lot of infrastructure -- in the water, no less -- to pursue their quarry. So moving in and out of wells takes a lot of time and a lot of money: the typical deepwater project can cost $1 billion or more, most or all of which would be spent over a five-year period before any returns are seen, according to petroleum industry adviser Gaffney, Cline and Associates. "As a result, projects currently underway are less likely to be stopped," said Bob George, an executive director and senior strategic adviser at the firm.

That's one of the reasons why companies like Energy XXI Ltd. (EXXI), W&T Offshore Inc. (WTI) and Stone Energy Corp. (SGY) have been punished so severely in the stock market after the dramatic drop in oil prices. Energy XXI, for example, is trading 83% off its 52-week high, while W&T's stock is down 70% and Stone's shares have declined 66%. Some observers think their troubles could force them to sell assets -- and perhaps themselves. "They are the tail end of the whip," as one industry watcher put it recently.

Royal Dutch Shell plc's $70 billion purchase of BG Group plc -- a deal that gives the buyer access to arguably the best deepwater oil resource globally in Brazil, according to Tudor, Pickering, Holt & Co. Securities -- could very well spark some M&A among companies operating offshore. "Shell's move ... is likely to reignite interest in a moribund space," Tudor, Pickering, Holt said.

Houston-based Energy XXI, led by John Schiller, probably didn't have the best of timing when it bought EPL Oil & Gas Inc. last year for $2.3 billion, which happened before oil prices began to slide and loaded it up with debt. Industry sources say the company hasn't been able to sell its shallow water assets in the Gulf of Mexico for a price it liked (bids came in at year-end and it was hoping for $300 million to $350 million). But it was able to raise $1.25 billion in a private senior notes offering to repay debt on its revolver, which bolstered its liquidity, and to amend its revolver, which provided some covenant relief. Global Hunter Securities Inc. analyst Mike Kelly said he remains on the lookout for the company's sale of its Grande Island pipeline assets, which could bring in an additional $250 million to $300 million.

However, Moody's Investors Services analyst Amol Joshi noted that the additional secured debt further subordinates Energy XXI's unsecured debt and exacerbates its already high leverage and interest expense burden. "While the company continues to pursue asset sales to stabilize its liquidity further, the company's balance sheet remains highly-levered and reduced capital spending could impact its production and Ebitda," he said.

Meanwhile, W&T Offshore, which is led by Tracy Krohn and has picked up assets from Shell, Woodside Petroleum Ltd. and Callon Petroleum Co. (CPE) over the years, has been trying to survive by repositioning itself. The Houston-based company cut its capital expenditures by 70% and has been shopping its Permian Basin assets in West Texas to focus on its deepwater developments, according to one analyst. But those properties aren't considered the core of the play, which has made it more difficult. "The bid-ask remains wide ... [and] any M&A that occurs will be in the core areas of the key resource plays," the analyst said. W&T bought the properties from an unnamed seller in 2011 for $366 million.

Stone Energy, led by CEO David Welch, also took drastic measures by suspending operations in Appalachia for the rest of the year. It could sell those assets (there's been talk about a joint venture with another company), but it could also sell down part of its Amethyst discovery in the deepwater Gulf of Mexico to bring in cash. Bankers have been talking about that idea and others to the Lafayette, La.-based company, according to people familiar with the situation.

There are some large companies out there ready to do some deals. The super-majors -- including ExxonMobil Corp. (XOM), Chevron Corp. (CVX) and Shell -- have the cash on hand to easily pick up assets as well as whole companies. They also have a longer time horizon that is inherent in offshore, particularly deepwater, projects. While many got out of the Gulf of Mexico shelf earlier in the decade (ExxonMobil sold its assets to Energy XXI in 2010 for $1 billion), they already operate in the deepwater there and could easily incorporate some shelf assets on the cheap and capture some synergies.

Private equity firms could also play a role. Riverstone Holdings LLC-backed Fieldwood Energy LLC has been consolidating in the Gulf of Mexico shelf in recent years with its asset acquisitions from Apache Corp. (APA) for $3.75 billion and SandRidge Energy Inc. (SD) for $1.1 billion. Apollo Global Management LLC-backed Talos Energy Offshore LLC bought shelf properties from Stone in July of last year for $200 million (Riverstone is also an investor). There's also Venari Resources LLC, which Warburg Pincus funded in 2012 with $1.13 billion.

The quick fix, of course, is for offshore companies to halt their exploration efforts, focusing only on the production side until oil prices improve. Some already are. BP plc, for example, recently canceled contracts on rigs owned by Ensco plc (ESV) and Seadrill Partners LLC (SDLP). The service providers didn't make out too badly: Ensco is getting a $160 million fee for the year left on its contract, or 78% of potential revenues, while Seadrill Partners' West Sirius is getting $160 million for almost 800 days, according to Raymond James. The news surprised its analyst Praveen Narra, who wrote in a recent report that he thought that deepwater Gulf of Mexico would be relatively strong as existing contracts would have led to a flat rig count year-over-year. "BP's desire to cancel the contract in spite of having to pay a high fee is indicative of the lack of work to be done," he said. "It is further evidence that the region [the Gulf of Mexico] is not immune." Tudor, Pickering, Holt agreed: "BP [is] a notable E&P operator in this important deepwater theatre, so [the] fact that they're paying up to early terminate two high-specification floaters speaks volumes regarding lack of near-term deepwater rig demand."

No doubt it's tough offshore with lower oil prices. Gaffney, Cline and Associates estimates that oil and gas companies need $60 per barrel oil or more to be viable in the deepwater, which doesn't make current projects look good right now. However, the firm's Bob George still thinks offshore companies operating in the Gulf of Mexico will fare better than onshore counterparts. "Although pain is likely for areas like the offshore Gulf of Mexico in 2015, it should be much better placed to weather the storm of depressed oil prices in the short term than the U.S. onshore unconventionals industry," he said. It could also be a place for some opportunistic dealmaking.