This post was updated on Jan. 13, 2015 to reflect corrections the analyst made to his original report with regard to Energy XXI. The chart has been updated and changes Energy XXI's liquidity ratio to 3.4% from 1.1%. Cacchione also updated Energy XXI's ability to fund its production replacement according to the company's capital budget of $130 to $150 million. According to his revised analysis, Energy XXI will be able to fund 60% of its production replacement. His initial analysis said Energy XXI would be able to fund 20%.
What is the 2016 outlook for U.S. oil and gas companies? For some, the outlook is so poor that one oil and gas expert has taken to calling them zombies.
On Monday, RBN Energy, a Texas-based provider of advisory services tied to the oil and gas markets, posted analysis from Nick Cacchione, a 25-year veteran of the oil and gas industry and the founder of Oil & Gas Financial Analytics.
Cacchione examined the financials of over 50 U.S. independent exploration and production companies. He zeroed in on the ones that "maxed out all their credit cards," which is to say the companies had a debt to capital ratio above 75% and an interest coverage ratio below three. Cacchione also reviewed the companies' ability to sustain current current cash flows by projecting 2016 cash flows based on third quarter results. He then compared that figure to the maintenance capital needed to replace 2015 production.
"Once you run out of cash and credit none of the available options are usually desirable," Cacchione wrote, noting that renegotiating debt and selling assets ultimately hurts creditors and shareholders. "Barring an unexpected substantial rise in commodity prices, the final options remaining for these companies could be liquidation or sale."
Based on these two criteria -- debt metrics and ability to replace production -- Cacchione identified 12 "zombie" companies (pictured below), which "look to be shuffling slowly toward their ultimate demise."
We highlighted a few of them below:
SandRidge Energy (SD): Despite the Oklahoma-based company being delisted from the New York Stock Exchange last week due to "abnormally low" trading price levels, Cacchione says the company is one of the "better-positioned" companies. Remember: this is a relative assertion given that the list represents the weakest companies in an already weak market. Cacchione notes that the company has $800 million in cash as of the third quarter, which could fund production through 2016, but that the company is unlikely to be able to fund production from its cash flow.
Sanchez Energy (SN): This Texas-based company is expected to be $700 million short of funding its 2016 production, according to Cacchione. In November, Sanchez announced that its borrowing base from the Royal Bank of Canada has been decreased to $500 million from $550 million, but its elected commitment amount of $300 million -- which is currently undrawn -- was unchanged. In December, Sanchez announced that it was reducing its capital budget range in 2016 to $250 to $300 million from $550 to $600 million in 2015. Cacchione believes this funds only one-third of full production replacement.
Energy XXI (EXXI): Shares of this Texas-based oil company were down 71% for 2015 and are now trading just above $1. Cacchione says that the company's announced capital budget of $130 to $150 million will only fund 60% of its production replacement. Debt proves to be a problem for this company as its debt to capital ratio is 125%. Energy XXI was further maligned in 2015, as Moody's lowered its rating on the company to Caa3 from Caa2 in October after the company repurchased its unsecured notes in the open market at a deep discount. Moody's viewed the transaction as a default.
Ultra Petroleum (UPL): This Texas-based company could fall $200 million short of funding production from cash flows in 2016, according to Cacchione. That said, Cacchione adds that the company could tap into its $352 million in liquidity. In its third-quarter filing with the Securities and Exchange Commission, Ultra Petroleum addressed the strain continued low energy prices would have on its ability to meet credit obligations, saying: "If over the next twelve months, crude oil and natural gas prices remain at current levels or fall to lower levels, the Company is likely to generate lower operating cash flows, which would make it more difficult for the Company to remain in compliance with all of its debt covenants."
Goodrich Petroleum (GDP): By Cacchione's analysis, this Texas-based company may have to "examine strategic options" in 2016 as it is currently not generating sufficient cash flow to meet interest payments -- let alone enough to fund production. Shares of the company are trading at around $0.20 and Moody's sounded alarm bells in September when it downgraded the company to Caa3 from Caa1.
"The negative outlook reflects our assumption that leverage will remain at high levels, and further debt exchanges are likely to happen," Moody's said at the time. "The rating could be downgraded if asset value further erodes or the company initiates a much-broader debt restructuring, e.g. bankruptcy."
If Cacchione's analysis proves to be true, these companies could find themselves on an episode of "The Walking Dead."
