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3/15/2015 10:13 am  #1

Debt ridden drillers looking for a way out

Oil drilling companies with little foresight and bad management practices are seeing the house of cards they built starting to collapse along with the worldwide price of oil products and the declining demand. The resulting situation will be a lot of M&A activity which will reduce competition and probably increase prices to pay for the acquisitions. Not a good thing for the consumer, but will probably result in the birth of several new multi-millionaires as the lousy management teams that drove their companies into debt ridden failing businesses because of their short sighted approach, will receive tons of cash when established big bucks multinational corporations open up their deep pockets for the buyout. Other losers: the employees who get pink slips due to downsizing and consolidation. So much for the trickle down effect . . . once again proving to be an ineffective, failed theory full of empty promises.

If you have the time, this article from The Motley Fool is worth the read:

Oil Stocks: Get Ready for Merger Mania
By Matt DiLallo
March 15, 2015

The rumors are already starting to fly. Just this past week, Bakken Shale focused driller Whiting Petroleum Corp's (NYSE: WLL  ) stock spiked double-digits after The Wall Street Journal reported that the company was seeking a buyer. That report is on the heels of another Journal report that Eagle Ford Shale driller Penn Virginia Corporation (NYSE: PVA  ) was holding an auction to sell itself.

Meanwhile, we have well-capitalized big oil giants like ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) raising billions of dollars in debt, with Exxon's CEO Rex Tillerson telling analysts that "there's really no limitation on what we might be interested in or considering" when it comes to acquisitions.

All of this suggests a merger wave clearly appears to be on the horizon. Here's a look at the companies that could be major players as America's oil industry pairs up, looking to emerge from the downturn in oil prices stronger than it entered.

Check, please!
One thing has become abundantly clear over the past few months: Too many shale drillers took on too much debt. That debt simply isn't manageable if $50 oil is here to stay for a while.

For example, the management teams of both SandRidge Energy (NYSE: SD  ) and Halcon Resources (NYSE: HK  ) both admitted on their fourth-quarter conference calls that they had too much debt for the current oil price. SandRidge's CEO James Bennett said that if $50 oil was the new normal, the company would "probably want to remove $1 billion of debt from the balance sheet," which currently has $3.2 billion in outstanding debt. Meanwhile, Halcon Resources' CEO Floyd Wilson told its investors that at current oil prices, the "appropriate leverage would be at least a third less than we have," which, considering the company's $3.7 billion in debt, that's also more than a billion dollars of extra debt.

These are just two examples of the dozens of overleveraged energy companies that could be seeking a buyer before their debt burdens sink them into bankruptcy should low oil prices stick around for a while. Debt is also a reason Whiting is looking for a buyer, as it assumed $2 billion in debt when it bought highly levered Kodiak Oil & Gas at the top of the oil market last year. Likewise, Penn Virginia had been using a lot of debt to fund its aggressive drilling program, and with that access to capital potentially diminished, it would need a deep-pocketed suitor to help it fund new wells.

Itchy trigger fingers
On the other side of the equation, there are a number of deep-pocketed oil companies that have been waiting for an opportunity to strike. Exxon has already made its intentions known, and it has been rumored to be dreaming big, with some suggesting a takeover of beleaguered BP (NYSE: BP  ) as not being beyond the realm of possibilities. That said, there's a lot of risk in buying BP because of its legacy issues stemming from the Deepwater Horizon disaster. However, the sky really is the limit for the oil giant, as Exxon has a pristine balance sheet and can basically buy whatever it wants right now.

Meanwhile, top U.S. independents like EOG Resources (NYSE: EOG  ) and Devon Energy (NYSE: DVN  ) could be buyers of smaller shale rivals, or even be targets for the Exxons and Chevrons of the world.

However, EOG Resources would like to keep growing on its own, which it has done by avoiding acquisitions and instead focused on growing organically. On its fourth-quarter conference call, though, the company said it wouldn't mind acquiring drilling acreage at fire sale prices. EOG has the second lowest leverage ratio in its peer group, so it clearly has the capacity to be aggressive in bulking up on its acreage position.

Devon Energy, on the other hand, hasn't been as reluctant to deal, as the company spent $6 billion to buy a prime position in the Eagle Ford Shale last year. Incidentally, its position is located in very close proximity to Penn Virginia's acreage in the play, making Penn Virginia a particularly appealing acquisition opportunity.

Other rumored buyers on the market include former natural gas-focused companies like Chesapeake Energy (NYSE: CHK  ) and EnCana (NYSE: ECA  ) . Chesapeake has a huge cash position on its balance sheet after it sold some of its natural gas assets at a premium price late last year. The company's CEO said on its most recent conference call that the one area where it would like to bulk up was its oil opportunities, so, any future acquisition would presumably be oil-weighted.

Meanwhile, EnCana actively rearranged its portfolio last year, adding $10 billion in oil-weighted assets. According to its CEO, the company is "very prepared to act if the right opportunity opens up" for another oil-weighted acquisition, with a smaller shale player being right in its wheelhouse.

Investor takeaway
It's quite possible we'll see a number of mergers and acquisitions before the year is over if the oil price doesn't meaningfully recover. Some deals will be forced sales as debt-laden sellers attempt to relieve some of the stress on their balance sheets.

Meanwhile, we could also see a megamerger or two as the strong get stronger in order to thrive no matter what oil prices do in the future. That should make for an good year for energy investors since a consolidation wave could take all boats higher.


3/16/2015 6:34 am  #2

Re: Debt ridden drillers looking for a way out

I recently heard that the average fracking site is only viable for about 3-4 years. If true, that's concerning considering they got a free pass in PA so far (during the high production years), and extraction fees are only now being talked about. Will it be too late to really get anything of significance from them for the residents of PA? Does anyone know if that is true?


3/16/2015 6:59 am  #3

Re: Debt ridden drillers looking for a way out

I DON'T think $50 oil will be anywhere near permanent. Perhaps a year at most. 

What WILL happen is that there will be a wholesale buying opportunity of the big players to absorb all those that cannot afford to stay in the game at these prices. Reminds me of some of the tycoons examples on the History Channel where one barron drove another out of business to gain his share. Business is always a gamble and many times the spoils go to those that have the deepest pockets. 


"Do not confuse motion and progress, A rocking horse keeps moving but does not make any progress"

3/16/2015 8:57 am  #4

Re: Debt ridden drillers looking for a way out

Investor takeaway
It's quite possible we'll see a number of mergers and acquisitions before the year is over if the oil price doesn't meaningfully recover. Some deals will be forced sales as debt-laden sellers attempt to relieve some of the stress on their balance sheets.

Meanwhile, we could also see a megamerger or two as the strong get stronger in order to thrive no matter what oil prices do in the future. That should make for an good year for energy investors since a consolidation wave could take all boats higher.

This is good info to have. I personally sold the one energy stock I had late last year and won't get back in until I see some stability. Apparently, $43 dollars/bbl is the threshhold for where oil should bottom out. It's at $44 right now. 

If you are in the market for the long haul, energy stocks are pretty cheap right now. And not just the major names like Exxon Mobil, but the ancillary companies like the oil equipment comapnies, offshore drilling operations, etc.

But speaking of Exxon/Mobil, it's close to a 52 week low right now at $83.80 a share. Down 10% from this time last year. Yet the dividend is staying at +3% a year. Not too shabby. Now might be a good time to get in if you believe like Tenny that we're not staying at $50 a share long term.

I think you're going to see a lot of different United States of America over the next three, four, or eight years. - President Donald J. Trump

3/17/2015 7:16 am  #5

Re: Debt ridden drillers looking for a way out

Jobs for laid off American shale oil field workers . . .

In Saudi Arabia ! ! !

Saudi Arabia Wooing Fired U.S. Shale Workers to ‘Join Our Team’

(Bloomberg) -- Workers fired from U.S. shale fields after the collapse in oil prices could soon have a new boss: the nation some blame for driving that decline.

The state-owned Saudi Arabian Oil Co., also known as Saudi Aramco, is posting new job ads online aiming to snap up experts in extracting oil from shale as the country seeks to become a leader in that rapidly expanding effort. Tens of thousands of U.S. workers have been fired since November as oil prices plunged because of oversupplies, driven in part by an OPEC decision supported by Saudi Arabia.

That’s now giving Saudi Aramco a better chance to lure experienced workers to its own shale formations. Difficult living conditions had previously made the country a hard sell, said Tobias Read, chief executive officer of Swift Worldwide Resources, a recruiting firm.

“We’ve seen people who have historically been reticent to look at Saudi Arabia who are now more accepting of a job there,” Read said in an interview.

For decades, the Saudis have recruited workers from the U.S. for its conventional drilling programs, offering hefty salaries and benefits as lures. Even so, “it’s been hard for us to put people there,” Read said. “The conditions are just quite difficult.”

Previously, Saudi Aramco didn’t need expertise in shale oil and natural gas exploration because it has large conventional oil reserves that don’t require expensive extra steps to develop, such as the hydraulic fracturing or horizontal drilling used in shale rock.

‘Unconventional’ Oil

As those highly productive fields age, however, development of shale resources, along with other hard-to-reach oil categorized as “unconventional,” may help Saudi Aramco maintain its dominance in the oil market, according to John Kingston, president of the McGraw Hill Financial Institute.

“With the layoffs, it’s a great time to do it,” he said about the recruitment effort.

Nigel O’Connor, a spokesman for Saudi Aramco didn’t answer questions on the specifics of the company’s campaign, or its timing. “To support the implementation of our strategy and continued growth, Saudi Aramco continues to hire expertise in a number of technical areas across the unconventional gas resource value-chain,” he said by e-mail.

In November, the Saudis led a decision by the Organization of Petroleum Exporting Countries to maintain production levels of its 12 member countries despite falling prices. The hiring campaign comes after some U.S. oil chiefs, including Continental Resources Inc. CEO Harold Hamm, blamed the Saudis for causing the North American cutbacks.

New Ads

In February, Saudi Aramco posted several new ads on websites including Rigzone and LinkedIn that focused on shale expertise. One recent LinkedIn listing for a petroleum engineer with shale experience drew 160 applicants in a month, according to data from the professional networking website.

“Consider the opportunity to join our team and help shape the future of key global unconventional resource development,” the ads say, referring to shale-rock exploration that’s led to a renaissance in U.S. oil and natural gas production.

Additionally, since the start of the year, Saudi Aramco has added an “unconventionals” category to its recruiting website, where 35 job listings require specific experience in shale. A recruiting company, Whitney Human Resources, has also written directly to prospective employees on Saudi Aramco’s behalf.

A February letter from Whitney obtained by Bloomberg News said there are three areas of the country where Saudi Aramco has an “active exploration program” for unconventional gas resources.

‘Exciting Development’

“Senior managers from the company will be in North America in the forthcoming months to meet professionals with your background who are interested in joining this exciting development,” the letter said.

A recruiting professional at Whitney declined to answer questions about its work with Saudi Aramco.

The nation is interested in developing natural gas in its shale formations to help replace the equivalent of 900,000 barrels a day of domestic crude and fuel oil used to generate local electricity supplies, according to a March 10 research note by a team of Barclays Plc analysts including David Anderson in New York.

On a recent trip to the region, the analysts learned that Saudi Arabia fears damaging its oil- and-gas-rich formations with shale drilling, which could hurt future production, Barclays said in the note. To date, only eight shale gas wells have been drilled in the country with plans to drill 135 wells over the next 3 years.

Recruiting Efforts

“Soon, Saudi Aramco will be known not just for conventional oil and gas production, but as a leader in full life-cycle unconventional gas development,” the company said in a recent ad.

Saudi Aramco’s shale recruiting efforts are akin to a Chinese factory running a U.S. factory out of business, then trying to hire the unemployed workers to improve operations in China, said Michael Webber, an associate professor at the University of Texas and deputy director of the Energy Institute.

After watching the U.S. shale revolution collapse on low prices, Saudi Aramco is seizing the opportunity to bolster its own expertise in shale.

“They don’t want to start from scratch,” Webber said. “They have no experience with shale and they have to hire outside workers. It’s a way to leapfrog.”

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