Commodities Small Oil Drillers Feel Brunt of Crude’s Decline Some Stocks Have Lost Half Their Market Value or More in the Past Month By Dan Strumpf Dec. 5, 2014 5:36 p.m. ET Wall Street Journal The selloff in crude prices has bruised energy companies big and small, but none have felt the pain worse than the nation’s heavily indebted oil drillers. Shares of small, North America-based oil and gas producers that loaded up on debt during times of high oil prices have plunged in the past month, in some cases losing half their market value or more. Shares of Goodrich Petroleum Corp. have plunged 87% from their peak in June and 49% in the past month. Energy XXI Ltd. ’s stock is down 51% in a month. Halcon Resources Corp. has fallen 36% in that time. In the years before 2014’s oil-price crash, these and other companies sold bonds and took out loans to fuel rapid growth in new and often costly fields across the U.S. That borrowing was easier to stomach when oil prices were $100 a barrel, but with U.S. crude down 39% in nearly six months, investors fear that some firms face slowing growth rates, reduced profits or a potential cash crunch. On Friday, U.S. oil prices fell to a more than five-year low. The front-month oil contract lost 97 cents, or 1.5%, to settle at $65.84 a barrel on the New York Mercantile Exchange, exerting further downward pressure on many oil-company shares. Some investors are holding on to the shares of smaller and indebted drillers, reluctant to sell with prices so low. Others are paring back exposure, unwilling to ride out the volatility amid a global oil-supply glut that shows few signs of abating. “The earnings are going to go down, the revenues are going to go down and in some cases there will be concerns about liquidity,” said Eric Green, a portfolio manager who helps manage $3 billion in equity investments at Penn Capital Management. Mr. Green owns a number of shares of smaller energy producers. He said he is hanging on, betting oil prices will rebound Investors said crude prices could return to more lofty levels if a geopolitical shock erupts or global growth picks up. Energy companies have issued a flurry of debt to finance the yearslong boom in domestic oil and gas production. The 10 worst-performing energy companies in the Russell 3000 index over the past month have an average debt load that is four times their market value, compared with an average debt-to-equity ratio of 1.2 for the energy sector, according to data compiled by Michael O’Rourke, chief market strategist at JonesTrading. “If you look at the last couple of years, there’s a number of insane junk deals that a lot of these energy companies have done,” said Bill Bell, a portfolio manager on the Atlanta Capital SMID-Cap fund, which holds $5.9 billion of small and midsize companies. Junk bonds, those rated below investment grade, are issued by companies with relatively low credit ratings. Mr. Bell said his fund has reduced its holdings of energy stocks over the past year, from about 4% to less than 2%. Goodrich Petroleum, which drills for oil in higher-cost fields in Louisiana and Mississippi has a debt load of more than three times its stock-market value. Shares ran up as much as 74% this year to trade as high as $29.60 in June, when U.S. oil hit a high for the year at $107.26 a barrel. On Friday, the stock closed at $3.71, down 5.1% on the day. The company didn’t respond to a request for comment. Energy XXI, which operates in the Gulf of Mexico area, has a debt load that is more than 11 times its market value. Shale producer Halcon Resources has a debt-to-equity ratio of more than 4 to 1. An Energy XXI spokesman said the company has hedged to protect against low oil prices through 2015, and “we’re starting to work on our 2016 hedges as we speak.” Halcon didn’t respond to a request for comment. Rafaelina Lee, a portfolio manager who helps oversee about $800 million of small and midsize stocks for Deutsche Asset & Wealth Management, said she has curbed her holdings of companies producing in more costly locations. “Some smaller-cap names don’t have as clean balance sheets,” she said. “In these times of high uncertainty, a clean balance sheet is definitely required, as well as disciplined management.” Investors said the outlook for energy producers depends largely on the direction of oil prices. U.S. crude output is expected to increase next year despite falling prices, which means a return to $100 oil is unlikely soon. Charles DyReyes, an analyst who focuses on energy stocks at Brandywine Global Investment Management, is combing through some battered shares of smaller energy firms. He said he expects oil prices to rebound in the coming year, possibly to $80 a barrel, an economical level for many producers. “I don’t need oil at $100 to make money here,” Mr. DyReyes said.
Posted on: Sat, 06 Dec 2014 13:00:18 +0000
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