The Safety Net Vanishing For Many Oil & Gas Companies
In the past many Crude Oil and Nat Gas companies secured part of their revenue by hedging contracts.
We reported in June that many of these companies saw their safety nets vanishing as Crude Oil prices did not recover. Then the market heard lots of cheer leading like ‘frack now, pay later,’ which were merely a bold move by struggling Oil services firms to encourage cash strapped Oil & Gas companies to continue operations on the cuff.
At the same time we began to see the bankruptcies of companies such as Samson Resources, Hercules Offshore and Sabine Oil & Gas Corp, thus putting the industry on notice that the real outlook for Crude Oil and Nat Gas is grim.
Credit rating agency Moody’s expects a sector wide negative cash flow of $80-B and is expecting spending cuts to continue next year.
So, in fact, debt, negative cash flows and the outlook for lower Crude Oil prices led weak companies with balance sheets to a divest.
So far in Y 2015 is a year with high volume takeovers, but not much about an M&A boom, as the financially stronger Oil & Gas companies seem to have postponed takeover plans and are focused on the acquisition of promising land holdings.
But, it is clear that buyers and sellers are preparing themselves for what could turn out to be a “Fire Sale” in the Oil Patch.
According to the data that I have seen over $200-B worth of Oil and Gas assets for sale worldwide. And that the majority of those assets for sale are located in North-America. Plus the debt pressure is a Deep Sea levels.
This heavy pressure and limited time to sell off assets has resulted in a steep price drop in Oil and Gas assets in North-America and the UK.
Whereas some of the more comfortably positioned drillers are selling off non-core assets in order to focus on core projects.
The amount of assets for sale is not likely to decrease any time soon.
According to Moody’s, 12.5% of junk rated Oil drillers were at risk of defaulting when Crude Oil fell below 40. And more ‘drillers in distress’ can only mean more Oil and Gas assets up for sale.
As dire as the situation is for some drillers, the financially stronger companies and investors are looking at something which might be developing into a generational opportunity for consolidation and growth in the energy sector.
It may be interesting and rewarding for energy investors and financially strong Oil and Gas companies to watch the assets being auctioned in what may soon turn out to be that Fire Sale of onshore and offshore positions in the best performing North-American plays.
The Winners will be the companies that secure strong positions without jeopardizing their balance sheets.
My work show that Crude Oil and Nat Gas can see prices at inflation adjusted Y 1998 marks of 20-22 bbl for Crude and 1.50-1.65 a pay unit for Nat Gas in North America.
|Analysis for OIL:||Overall||Short||Intermediate||Long|
|Neutral (-0.15)||Neutral (-0.08)||Neutral (-0.12)||Bearish (-0.25)|
|Analysis for USO:||Overall||Short||Intermediate||Long|
|Neutral (-0.11)||Neutral (-0.04)||Neutral (-0.15)||Neutral (-0.14)|
|Analysis for UNG:||Overall||Short||Intermediate||Long|
|Very Bearish (-0.54)||Very Bearish (-0.54)||Very Bearish (-0.60)||Bearish (-0.46)|