The largest shale oil bankruptcy in years just happened.
If you own oil stocks, you’ll want to read today’s essay very closely. Because there’s a good chance hundreds more oil companies will go bankrupt soon.
As you probably know, the oil market is a disaster. The price of oil has plunged 75% since 2014. In February, oil hit its lowest level since 2003.
Oil crashed for a simple reason: There’s too much of it.
New methods like “fracking” have led to a huge spike in global oil production. Today, oil companies pump about 1 million more barrels a day than the world uses.
• Last year, America’s biggest oil companies lost $67 billion…
To offset low prices, oil companies have slashed spending by 60% over the past two years.
They’ve laid off more than 120,000 workers. They’ve sold assets and abandoned projects. Some have even cut their prized dividends.
For many oil companies, deep spending cuts weren’t enough…
• The number of bankruptcies in the oil industry has skyrocketed….
Bloomberg Business reported earlier this month:
Since the start of 2015, 130 North American oil and gas producers and service companies have filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone.
And that doesn’t even include two “big name” bankruptcies in the last couple weeks…
Two weeks ago, Linn Energy filed for bankruptcy, making it the largest shale oil bankruptcy since 2014. It owes lenders $8.3 billion.
A week later, SandRidge Energy declared bankruptcy. It became the second-biggest shale oil company to go bankrupt. The company owes its lenders about $4.1 billion.
Ultra Petroleum, Penn Virginia, Breitburn Energy, and Halcón Resources also filed for bankruptcy in the past couple weeks.
• Hundreds more oil companies could go bankrupt this year…
The Wall Street Journal reported last week:
This year, 175 oil-and-gas producers around the world are in danger of declaring bankruptcy, and the situation is nearly as dire for another 160 companies, many in the U.S., according to a report from Deloitte’s energy consultants.
Defaults by oil and gas companies are already skyrocketing. The Wall Street Journal continues:
Oil and gas companies this year have defaulted on $26 billion, according to Fitch Ratings data. That figure already surpasses the total for 2015, $17.5 billion.
Fitch, one of the nation’s largest credit agencies, expects 11% of U.S. energy bonds to default this year. That would be the highest default rate for the energy sector since 1999.
• Many investors thought the oil crisis was over…
That’s because the price of oil has surged 80% since February.
Dispatch readers know better. For months, we’ve been warning there would be more bankruptcies and defaults. We said many oil companies need $50 oil to make money. The price of oil hasn’t topped $50 a barrel since last July.
Even after its big rally, oil still trades for about half of what it did two years ago.
• Oil prices will stay low as long as there’s too much oil…
Although the world still has too much oil, the surplus has shrunk in the past few months. In February, the global economy was oversupplied by about 1.7 million barrels a day. Thanks to U.S. production cuts, the surplus is now just 1.0 million barrels a day.
The number of rigs actively looking for oil in the U.S. has dropped by 80% since October. This month, the U.S. oil rig count hit its lowest level in 70 years.
However, many other countries aren’t cutting production at all. Saudi Arabia and Russia, two of the world’s biggest oil-producing countries, are both pumping near-record amounts of oil.
Frankly, these countries don’t have much choice. Oil sales account for 77% of Saudi Arabia’s economy. And oil accounts for 50% of Russia’s exports.
If these countries stop pumping oil, their economies could collapse.
• Low prices have made it impossible for some oil companies to pay their debts…
U.S. oil companies borrowed nearly $200 billion between 2010 and 2014.
If you’ve been reading the Dispatch, you know the Federal Reserve is mostly to blame for this. It’s held its key interest rate near zero since 2008. This made it incredibly cheap to borrow money.
When oil prices were high, the debt wasn’t an issue. Companies made enough money to pay the bills. That’s no longer the case. Today, many oil companies are burning through cash to pay their debts.
• To make matters worse, many weak oil companies have been cut off from the credit market…
Before prices collapsed, oil companies could refinance their debt if they ran into trouble. This could buy them time to sort out their problems.
These days, many banks will no longer lend oil companies money. Bloomberg Business reported last month:
Almost two years into the worst oil bust in a generation, lenders including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are slashing credit lines for struggling energy companies…
Since the start of 2016 lenders have yanked $5.6 billion of credit from 36 oil and gas producers, a reduction of 12 percent, making this the most severe retreat since crude began tumbling in mid-2014.
• Oil stocks are still very risky…
But that doesn’t mean you should avoid them entirely.
As we’ve said before, oil stocks have likely entered a new phase. You see, when oil prices first tanked, investors sold oil stocks indiscriminately. Both strong and weak stocks plunged.
In other words, investors “threw the baby out with the bath water.” You often see this behavior during a crisis.
Exxon Mobil (XOM), the world’s biggest oil company, fell 34% since 2014. Chevron (CVX), the world’s second-biggest, dropped 48%.
Now that oil has stabilized, the stronger companies are separating themselves from the weaker companies. This year, Exxon is up 15%. Chevron is up 11%.
The crash in oil prices has given us a chance to buy world-class oil companies at deep bargains.
• If you want to own oil stocks, stick with the best companies…
If you’re going to invest in the sector, there are four key things to look for: Make sure you buy companies that can 1) make money at low oil prices. You should also look for companies with 2) healthy margins 3) plenty of cash and 4) little debt.
In March, Crisis Investing editor Nick Giambruno recommended a company that hits all of these checkmarks. It has a rock-solid balance sheet…some of the industry’s best profit margins…and “trophy assets” in America’s richest oil regions. It can even make money with oil as cheap as $35.
The stock is up 9% in two months. But Nick thinks it could just be getting started. After all, it’s still 30% below its 2014 high.
You can get in on Nick’s oil pick by signing up for Crisis Investing. If interested, we encourage you to watch this short presentation. It explains how you can access Nick’s top investing ideas for $1,000 off our regular price. This incredible deal ends soon. Click here to take advantage while you can.
You’ll also learn about an even bigger “crisis investing” opportunity on Nick’s radar. This coming crisis could radically change the financial future of every American. By watching this video, you’ll learn how to profit from it. Click here to watch.
Chart of the Day
Oil and gas companies are losing billions of dollars…
We’re in earnings season right now. This is when companies tell investors if their earnings grew or shrunk last quarter. A good earnings season can send stocks higher. A bad one can drag stocks down.
As of Friday, 95% of the companies in the S&P 500 had shared first-quarter results. Based on these results, the S&P 500 is on track to post a 6.8% decline in earnings. That would be the biggest drop in quarterly earnings since the 2009 financial crisis.
Oil and gas companies are a big reason U.S. stocks are having such a horrible earnings season.
As you can see below, first-quarter earnings for energy companies in the S&P 500 have plunged 107% since last year. Keep in mind, this group includes Exxon, Chevron, and other blue-chip energy stocks.
Again, if you’re looking to buy oil stocks, make sure you “look under the company’s hood” before you buy it. Steer clear of companies that are losing money and have a lot of debt.
Delray Beach, Florida
May 25, 2016
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