March 16, 2020 BARRON’S 31
Low Prices. High Energy
Here are seven companies that analysts recommended to Barron’s as ones that
could still prosper amid the slump in oil prices.
Recent Mkt YTD ’20E ’20E Div
Exploration & Production Price Val (bil) Chg EPS P/E Yield
Concho Resources / CXO $40.84 $8.0 -53.4% $3.23 12.7 2.0%
Nautral Gas
Cabot Oil & Gas / COG $16.85 $6.7 -3.2% $0.79 10.4 2.4%
Refining
Phillips 66 / PSX $48.95 $21.5 -56.1 $8.76 5.6 7.4%
Valero Energy / VLO 43.72 17.9 -53.3 7.90 5.5 9.0
Shipping
Euronav / EURN $10.08 $2.2 -19.6% $2.13 4.7 3.5%
International Seaways / INSW 22.77 0.7 -23.5 6.12 3.7 1.1
Scorpio Tankers / STNG 18.91 1.1 -51.9 4.07 4.7 2.1
E=Estimate. Source: Bloomberg
near term. Goldman Sachs analyst
Brian Singer estimates that oil could
fall to the “cash cost” of production for
U.S. and Canadian drillers, which he
estimates as being in the mid-$20s.
“It’s rational to think you’re looking
at a year’s worth of disruption,” says
Andy Brogan, leader of EY’s oil and
gas practice. “The trajectory out of the
disruption is a bit unknowable. For
the first time since the financial crisis,
we actually have a market that’s
shrinking.”
Bankruptcies are inevitable, though
they might not happen immediately.
The oil-and-gas industry was forced to
restructure after the 2014-2016 oil
price crash, which pulled Brent crude
down to $28 a barrel from $118. In
2016, 70 North American oil and gas
producers filed for bankruptcy, accord-
ing to the law firm Haynes and Boone.
However, companies have learned
some lessons—about hedging oil
prices and restraining growth in their
capital budgets, for instance. In 2017,
there were just 24 bankruptcies. But
too many drillers have feasted on
cheap debt since than.
“Bankers will be unwilling to refi-
nance at this time, given how much
riskier the sector has become with
geopolitical factors well beyond their
control,” Kathy Hipple, an analyst at
the Institute for Energy Economics
and Financial Analysis, wrote in an
email toBarron’s. “Some frackers have,
indeed, hedged and have become more
efficient at production—but remem-
ber, they’ve been cash flow-negative,
in aggregate, for a decade, with higher
oil prices.”
Among the companies that Hipple
pointed to as having troublesome debt
loads isOccidental Petroleum
(OXY), which slashed its dividend by
86% and its 2020 capital spending by
32% on Tuesday. Its decision to buy
Anadarko Petroleum last year leaves it
with $38.5 billion in debt sitting heav-
ily on its balance sheet.
Predictably, yields for energy
stocks in the high-yield debt market
spiked last week. Deutsche Bank pro-
jected at the start of the year that 15%
of high-yield energy debt would end
up in default, but now expects the
market to go “materially above that.”
Indeed, even debt of companies
listed as investment-grade, including
Occidental,Continental Resources
(CLR), andOvintiv(OVV), have been
trading at distressed levels—more
than 10 percentage points above Trea-
suries—at times.
Predicting which companies go
bankrupt is not necessarily a useful
pursuit, however. Stifel’s Whitfield
expects the actual bankruptcy rate to
be relatively low, despite the distress,
because “banks don’t want to own that
many energy companies.” He expects
many lenders to restructure the debt
to keep producers afloat.
It’s more useful to consider which
companies might cut their dividends.
The two biggest U.S. oil producers,
Exxon Mobil(XOM) andChevron
(CVX), offered investors little in the
way of new guidance last week, al-
though analysts suspect they will pro-
vide updates soon. Few on Wall Street
expect near-term payout reductions
from either of those heavyweights. But
J.P. Morgan analyst Phil Gresh thinks
Chevron should immediately cease its
stock buybacks.
Asked about its buyback,dividend,
and drilling plans, a Chevron spokes-
person wrote that the company has
the strongest balance sheet and lowest
breakeven prices in the industry, but
added that it is “reviewing alternatives
to reduce capital expenditures.”
Exxon, which presented an aggres-
sive drilling plan to investors just a
week before the crash, had no update
about its intentions, aside from point-
ing to a statement that CEO Darren
Woods made at its investor day, which
said that the company will “continu-
ously evaluate our priorities.” The
energy giant paid out $14.7 billion in
dividends to shareholders last year; its
$5.4 billion in free cash flow didn’t
come close to covering it. Exxon’s divi-
dend yield was over 9% at the end of
the week. Chevron’s hit 6.2%.
Oil services companies—particu-
larly those that drill on land—could
be in even worse shape than the pro-
ducers.
Bernstein analyst Nicholas Green
pointed to five that he thinks need to
cut their dividends sooner, rather than
later:TechnipFMC(FTI),Helmer-
ich & Payne(HP),Patterson-UTI
Energy(PTEN),Petrofac(POFCY)
andSchlumberger(SLB). He wrote
that “our models show insufficient
free cash flow out to 2022, even before
the latest crash.”
None of those companies re-
sponded to requests fromBarron’sfor
comment.
In the long run, the U.S. shale in-
dustry will survive after a painful re-
trenchment. Saudi Arabia and Rus-
sia’s “power” moves are actually a sign
of weakness, some experts say.
“This is the death rattle of OPEC
really,” argues Ryan Giannotto, direc-
tor of research at ETF provider Gran-
iteShares. “They not only failed to
reach an agreement; the agreement
they reached was to all-out destroy
each other.”B
“It’s rational to think
you’re looking at
a year’s worth of
disruption, The
trajectory out of
the disruption is
a bit unknowable.”
Andy Brogan, leader of EY’s
oil and gas practiceBalanceofPower
The U.S. share of the global oil market is expected to shrink as Saudi Arabia
and Russia ramp up production.
Source: Stifel E=Estimated
2019E Global Oil Production 2022E Global Oil Production0255075100%OPEC U.S. Russia OtherDebt Binge
Weak balance
sheets have left
some energy
companies
vulnerable to the
slump in prices.
$120 B
The amount of
debt that oil and
gas producers
have accumulated
in the past five
years