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Oil Companies Near Bankruptcy

Investopedia logoInvestopedia 29-07-2015 Adam Hayes
An analysis of publicly traded companies in hard financial times.© Thinkstock An analysis of publicly traded companies in hard financial times.

The price of crude oil is once again hitting fresh lows. After its stunning decline from over $100 a barrel to below $50 in the spring of 2015, many had hoped the worst of the oil collapse was over. In fact, the summer months brought with it a rebound in the price of oil, rising above $65 a barrel. With the resumed uncertainty in Europe surrounding Greece and the sudden bear market gripping China, the price of oil has once again slid under $50. While low oil prices may be welcomed by drivers at the gas pump, many oil companies are feeling the pain. (For more, see also: How Low Can Oil Prices Go?)

The shale oil boom in the United States is predicated on the market price of oil remaining higher than its cost of production. But because shale oil is a particularly difficult and expensive method of oil extraction, persistent low oil prices means that they will continue to operate at a marginal loss, ultimately leading to bankruptcy. (For more, see: A Complex Story: Global Impact of Low Oil Prices.)

Some Oil Companies Have Already Gone Under

The initial drop in oil prices in the winter and spring of 2015 has already brought with it a string of oil-related bankruptcies. In March, Quicksilver Resources, a billion-dollar shale operation filed for Chapter 11 bankruptcy protection after missing a bond payment. Also that month, BPZ Resources shuttered its operations as well as Dune Energy, and they were subsequently followed by Sabine Energy, WBH Energy and American Eagle Energy. Not only do these bankruptcies hurt the shareholders in those companies, but they also ripple through to the financial sector who issued loans and credit to these companies, the land owners who leased their property to drillers, as well as those workers who have now become unemployed. (For more, see also: Falling Oil Prices Could Bankrupt These Countries.)

Oil Companies Next at Risk for Bankruptcy

The renewed bear market in oil is likely to take more casualties in the coming weeks and months. Investment bank Goldman Sachs Group Inc (GS) issued a report earlier this year ranking the relative financial strength of oil companies exposed to low oil prices. The findings are reproduced in the table below from their report:

Group 1 and 2 companies have strong balance sheets, in the sense that they have enough cash or liquidity on hand to service their debts and weather a prolonged period of low profitability. Groups 3 and 4 include companies with weak balance sheets who are at risk of going under. Group 3 companies are those who may be acquired at a bargain by larger oil companies as they begin to struggle, and are at less risk of outright bankruptcy. Group 4 companies, on the other hand, are at great risk. 

Let's take a quick look at the stock performance of these companies most at risk since this report was issued in January:

1. Approach Resources (AREX) has seen its stock price tumble more than 33% year-to-date.

2. Exco Resources (XCO) shares are down 74%.

3. Goodrich Petroleum (GDP) is down over 80%.

4. Halcon Resources (HK) has lost 50% of its market capitalization.

5. Magnum Hunter's (MHR) stock price is down almost 70% since Jan. 1.

6. Midstates Petroleum (MPO) has lost 65% of its value.

7. Rex Energy (REXX) is down nearly 56%.

8. Sabine Oil & Gas has gone bankrupt.

9. SandRidge Energy (SD) trades more than 70% lower than at the beginning of the year.

10. Swift Energy (SFY) is down more than 80% year-to-date.

There is a high probability that these nine American oil companies left standing will be the next to fall.

The Bottom Line

Low oil prices have plagued petroleum companies now for half a year, and with the global economy on shaky ground, the demand for oil may stay lower than expected. As a result, there are likely to be more bankruptcies in the energy sector by those companies with weak balance sheets who are no longer able to profitably produce oil in today's market. At the same time, now might be a great opportunity to find oil companies who may weather this downturn and see their stock prices recover in the future. For those companies, now might be a unique opportunity to invest.

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