Main Stream thinking re Sector
MW UPDATE: These U.S. oil producers have the most to lose Last update: 02/12/2014 3:11:15 am By Philip van Doorn, MarketWatch Highly indebted shale companies are in big trouble if crude prices remain low As investors expect oil prices to slide more, the big questions include: Which stocks will be hit the hardest, when will the price decline end and which shares eventually will be best to ride a rebound? Crude oil for January delivery on the New York Mercantile Exchange (CLF5) rose 5% Monday, but stocks of U.S. shale-oil producers continued to take a beating. Ted Harper, a portfolio manager and senior research analyst at Frost Investment Advisors, called Monday's stock action "an extension of Friday's activity," because of an abbreviated trading session following the Thanksgiving holiday and some surprise at OPEC's decision not to boost oil prices by cutting production. The decisions last week by OPEC, Russia and Mexico not to lower their oil output targets are logical responses to the long-term threat to those countries' economic interests posed by the vastly increased production of oil by U.S. companies. For an excellent guide to actions taken by the oil cartel to protect its market, see this brief, wondrous history of OPEC's landmark events by William Watts. The fifth slide is a real eye-opener. The good news is that the 33% drop in the price of oil at home, and the 40% decline in North Sea Brent crude since June, has put extra money in the pocket of U.S. consumers, and the United States has gained a long-term strategic advantage through its production expansion. But shale oil is expensive to produce. Increases in production for 2015 have been long planned -- and are still expected by analysts. But according to Henry To, chief investment officer at CB Capital Partners, if the price of Brent declines below $70 a barrel, "most major U.S. shale-oil fields will lose money." So the first big question for investors is when will the price of oil bottom out. On Monday, To shared three reasons why it will happen soon, including an expected cut in output next year, an increase in U.S. demand and quantitative easing in Europe that will support higher asset prices. In the meantime, there will be continued pressure on U.S. oil producers, especially those with the most burdensome debt loads. James Wicklund, the managing director of energy research at Credit Suisse (CS), said in an email exchange Monday: "The producers with the most debt are at the most risk since banks could change price decks and they have more relative cash flow directed toward interest payments rather than drilling, so they're most likely to see production declines." For investors looking to limit risk, here's a list of U.S. shale-oil producers with market values of at least $50 million and share prices above a dollar as of Friday's close with the highest ratios of debt to equity: Company Ticker Debt - most recent quarter-end ($mil) Total equity ($mil) Debt/ equity Total return - November Total return - YTD Ultra Petroleum Corp. $3,426.000 $5.198 65,910% -13% -8% Midstates Petroleum Co. 1,669.150 $334.277 499% -23% -65% Memorial Resource Development Corp. $2,111.800 $436.278 484% -20% N/A Isramco Inc. $112.712 $26.740 422% 7% 10% Jones Energy Inc. Class A $770.000 $182.937 421% -18% -30% Exco Resources Inc. $1,549.439 $427.042 363% -4% -43% PetroQuest Energy Inc. $422.500 $130.059 325% -21% -14% Goodrich Petroleum Corp. $609.464 $214.587 284% -27% -64% Linn Energy LLC $12,310.146 $4,932.133 250% -26% -35% Halcon Resources Corp. $3,533.852 $1,517.866 233% -27% -41% Total returns assume dividends are reinvested. Source: FactSet Memorial Resource Development Corp. completed its initial offering in June, priced at $19 a share, for a total return of 14% through Friday's close at $21.60. As you can see, most highly leveraged U.S. producers have taken a pounding this year, but that doesn't necessarily make this a "sell" list. Many oil stocks have done even worse. The largest producer on the list is Linn Energy LLC, a well-known dividend play, with a monthly distribution of 24.2 cents for each partnership unit. But investors have sent that dividend up to 15.91%, based on Friday's closing price of $18.25. Frost Investment Advisors' Harper said in a phone interview Monday that oil prices could signal a "re-basing" of commodity prices. He expects some of the highly leveraged shale producers to "probably cease to exist in their present form," while others "will be compelled to sell assets as very attractive levels to keep the lights on and a modest amount of production on-line." Harper was careful not to predict when the price of oil would bottom, but he did say that "markets tend to overshoot to the upside and the downside," and that he "wouldn't be surprised at further weakness." Among well-known U.S. oil producers with strong balance sheets that will "certainly be able to manage through this process," according to Harper, are EOG Resources Inc. (EOG), which he called "probably the bellwether for domestic-shale plays." Harper said EOG would have to "rein in [capital expenditures] a bit," and added that if oil were priced at $65 a barrel, the company would be "modestly free-cash-flow negative." He also named Concho Resources Inc. (CXO) as a mid-cap company that is "well-positioned to navigate through a more extended period of soft commodity prices." Kevin Mahn, chief investment officer for Hennion & Walsh Asset Management, said on Monday that the long-term prospects for the U.S. shale-oil industry are still good as the nation "will be energy independent within 10 years." He said oil prices were unlikely to stay low enough long enough to make much shale production unprofitable. As a result, Mahn sees this as an "attractive entry point" for long-term investors interested in buying beaten-down oil companies. Still, he cautions that "it could get more attractive" as stock prices extend their declines. Neither Harper nor Mahn expect the federal government to step in and prop up domestic producers through loan guarantees, even though the playing field with most rival nations isn't level. But Washington's free-market approach could change, depending on how long the oil carnage lasts. "If we're 18 months down the road and sub-$60 the entire time, that might be something that begins to percolate, but there has to be a lot more pain before we see government action," Harper said. -Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com RELATED: China plays big role in oil's slide(China plays big role in oil's slide .) RELATED: When an oil man sees $30 a barrel, sound the contrarian alarms(When an oil man sees $30 a barrel, sound the contrarian alarms https://www.marketwatch.com/storyno-meta-for-guid.) RELATED: Down 11% or not, those early holiday-sales figures are worrying(Down 11% or not, those early holiday-sales figures are worrying https://www.marketwatch.com/storyno-meta-for-guid.) (END) Dow Jones Newswires December 02, 2014 06:11 ET (11:11 GMT) Copyright (c) 2014 Dow Jones & Company, Inc.