At what point is oil too low for its own good? At what point do the bankruptcies begin to wreak havoc with the rest of the market?
It's awfully hard to pin down. First, we have denials by pretty much every firm that might be in trouble. And we have opportunities to cure debt, at least for now.
For example, take Southwestern Energy (SWN). Back in October before oil and natural gas entered freefall status, it picked up $5.3 billion in properties from Chesapeake Energy (CHK), including 413,000 prime Marcellus and Utica acres in Pennsylvania and West Virginia. The land had ready income, because it included 1,500 wells that produced 360 million cubic feet of gas every day.
Of course, all of oil and gas pricing has collapsed since then, and even though the acreage is very good, we know that natural gas didn't even spike during the polar vortex of last week. This pretty much indicates that Southwestern may not have gotten the better of the deal.
Since then, Southwestern's stock has dropped from $32 to $23. The stock as at $48 during April of last year, when there was heavy call buying and speculation that SWN would be acquired. Man, was that ever wrong.
One thing's for certain. After today, nobody's going to bid for Southwestern, as it is offering 20 million shares of common stock and 20 million depository shares that convert into a convertible preferred. The offering will cure any issues involving cash flow from the money borrowed to buy the Chesapeake assets.
Here's the issue, though. With oil plummeting today again, with alacrity, and Goldman Sachs, a former oil bull turning bear, the one thing we do know is that there are a lot more Southwesterns out there, meaning companies that need to raise money, but not a lot of companies with Southwestern's pedigree. You see, Southwestern is the highest quality of natural gas companies, so it can get a decent price for its offerings. But if you've been stuck in this thing all the way down, the offering is the last thing you want to see.
I believe that most of the oil companies that are "in trouble" now do not have that luxury. They won't be able to raise money that easily or they will have to give up a lot of their upside to those who lend it, something Linn Energy (LINE) recently did with its deal from Blackstone (BX).
I also think that there are still way too many bulls on the oils, if oil hits Goldman's low $40s target. Given that oil touched $45 today, that's not much to fall.
Take, for example, Schlumberger (SLB). This company is the best of the best, by far the finest oil service company in the world. Today, Goldman Sachs went from buy to hold on this stock. Given its decline from $118 in July, around the time that Morgan Stanley touted it as one of the greatest opportunities of the year, to now at $77, down 4%, I figured perhaps it is now one of the great opportunities. Certainly is cheaper than when Morgan Stanley liked it.
But then I looked at where oil was when the stock was here last, around $100, and then I looked at how many buy recommendations there still were on the darned thing, and I discovered that the vast majority of analysts are still bullish.
That combination makes the stock way too dicey. Keep in mind this Schlumberger is the highest-quality company in the whole oil service industry.
To me, that says "stay away." More pain ahead, and if oil go below $40, I believe there will be a cash flow decline of as much as $70 billion. While I remain a bull on what lower oil can mean for our economy, there's just no way yet to be bullish on the oil service group. Not with all the pain that gets triggered by that shortfall and the possibility that a Southwestern scenario, or worse, lurks for so many companies that bought off more than they can chew.