In poker, it's best not to be too confident in what looks like a winning hand until all the cards are laid on the table. Similarly, in investing, while investors want to "buy low," there is such a thing as getting in too early. Low prices could represent a buying opportunity, but they also likely hint at fundamental problems in a company.
No question, over the last year and half, anything in the market that touches oil has been hammered. While Tuesday brought reports that major oil producing countries agreed to production cuts, it will be some time that the cuts -- if true -- will provide meaningful relief for the industry.
A sustainable rise in prices will be enough for some oil companies to return to profitability. However, many others are likely to continue to struggle due to the hefty debt burdens they took on in more halcyon times. Should these five companies -- bearing the same suit -- be in your portfolio, it may be time to flush them down the drain.
As the saying goes: Know when to hold 'em and know when to fold 'em.
Marathon Oil (MRO): Shares of Houston-based Marathon Oil are down 74% over the last year and now trade above $7. The company reported its fourth quarter on Wednesday after the market close. Marathon Oil's reported adjusted net loss for the quarter was $0.48 per share, which was in line with estimates of analysts surveyed by Thomson Reuters. The company also announced that its full year capital program came in $500 million under budget and it confimed cost cutting measures it took, which included a 20% reduction in its workforce and cutting its quarterly dividend. As of its third quarter filing with the SEC, the company has $7.3 billion in long-term debt, with many of its notes coming due over the next five years trading just below par, according to data compiled by Thomson Reuters. Earlier this month, Standard & Poor's Rating's Services lowered Marathon Oil's credit rating to BBB- from BBB, placing it just one notch above investment grade.
Whiting Petroleum (WLL): Shares of Denver-based Whiting have fallen 87% over the last year and now trade around $5. As of the company's third quarter filing with the Securities and Exchange Commission, it had $5.2 billion in long term debt, with the nearest note coming due in 2018. All of its notes currently trade well below 50 cents on the dollar, according to data provided by Thomson Reuters. In the company's call with analysts last quarter, CEO Jim Volker affirmed that repaying its debts is one of the most accretive things it can do for its net asset value.
"You never know where oil prices or natural gas prices are headed. You do know that if you pay off blank million dollars' worth of debt, you do know how much that makes your NAV go up," Volker said.
In November, the company announced it was going to redeem $798 million in aggregate principal amount of its notes coming due in 2019 by borrowing against its $3.5 billion credit facility.
WPX Energy (WPX): Shares of Oklahoma-based WPX Energy are down 66% over the last year and trade just above $4 a share. As of the company's third quarter filing with the SEC, it had $3.4 billion in long-term debt, with much of it trading below 50 cents on the dollar. Earlier this month, the company's credit rating was downgraded one notch further into "junk" territory by Standard & Poor's and it now has a rating of BB-. The downgrade followed WPX Energy's announced plans to sell its Piceance Basin assets for $910 million. While the sale was intended to improve WPX Energy's liquidity position, Standard & Poor's noted that the sale would diminish the company's scale of operations and "could offset the benefits of the higher weighting to crude oil production post sale."
Oasis Petroleum (OAS): Shares of this Texas-based company are down 72% over the last year and currently trade below $5. It has $2.4 billion in long-term debt, which was recently lowered to B+ from BB- by Standard & Poor's. Much of its debt trades for approximately 50 cents on the dollar. The ratings agency estimates Oasis Petroleum's debt/EBITDA ratio to exceed 5x over the next two years. Last month, Oasis Petroleum announced a public offering of 34 million shares of common stock, which was expected to yield $160 million. The proceeds of the offering are expected to be used for "general corporate purposes" and to fund some of its 2016 capital expenditures.
Northern Oil and Gas (NOG): Minnesota-based Northern Oil & Gas states that its success is due to in part to acquiring "non-operated" positions with leading exploration and production operators in the Williston Basin. Over the last year, its stock has fallen 66% and trades below $3. Meanwhile, its corporate credit rating was lowered to B- from B by Standard & Poor's and the rating on its unsecured note coming due in 2020 was downgraded to CCC+ from B- with a negative outlook. As of the third quarter, the company had borrowed $170 million on its $550 million credit facility, which it is working to pay down.
