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These Shale Companies Will File For Bankruptcy First: Goldman's "Best And Worst" Shale Matrix
Over a month ago we presented a ranking of "America's most levered energy companies." Since then they have all, without exception gotten clobbered, not only in their publicly traded stock but also their debt.
Today, long after the liquidation whirlwind has left junk bond owners dazed and confused, Goldman catches up, and lays out a matrix of shale companies sorted not only by leveraged (they see 2.5x as the cutoff; we used 4.0x) but also by shale asset quality. From there, it also lays out the various opportunities, if any, available to the management teams in the resultant 4 quadrants.
Readers will be most interested in the "restructuring/bankruptcy" option, most applicable for Group 4, because these are the names which, all else equal, will file for bankruptcy first.
This is what Goldman's Jason Gilbert has to say:
We believe oil market weakness presents H&Y E&P management teams with difficult decisions. For certain stronger companies, the challenge may be one of deciding if and when to high grade the portfolio through M&A. For some weaker companies, the decisions may be more stressful, with many lower-quality names being forced to consider (1) selling themselves, (2) restructuring/filing for bankruptcy protection, and/or (3) bolstering liquidity through asset sales and/or second lien debt issuance.
We have created a 2x2 matrix, shown in Exhibit 1, where we classify E&Ps according to both asset quality and balance sheet strength. In Exhibit 2, we provide the backup data on each company that justifies its classification in the chart below.
The matrix in question:
the explanation:
Group 1: Strong balance sheet/strong assets
Companies in this group have assets we rate “B+” or higher and leverage below 2.5x. Names that we place in this group include Chesapeake Energy (OP), Concho Resources (NC), Cimarex Energy (NC), and Diamondback Energy (NC). The average yield for this group is 6%.
From a strategic standpoint, we view companies in this grouping as having high optionality on both the buy and the sell side. In other words, these are companies we could envision as targets for IG upstream players looking to add high-quality shale exposure. However, these companies could also be acquirers of distressed assets or companies with complementary portfolios. From a bondholder perspective, we believe this group is well positioned for consolidation in the industry.
Group 2: Strong balance sheet/weak assets
Companies in this group have assets we rate “B” or lower and leverage also below 2.5x. Names include QEP Resources (NC), Newfield Exploration (OP), WPX Energy (OP), SM Energy (NC), and PDC Energy (NC).
Similar to Group 1 above, we see these companies as adders of acreage, with a focus on core positions in key shale plays. Unlike companies in Group 1, however, we do not view these names as likely targets for IG upstream. With an average yield of 7.1%, we believe bond pricing somewhat reflects this lack of upside optionality vs. Group 1.
Group 3: Weak balance sheet/strong assets
This group includes companies with 2015E leverage above 2.5x and assets we rate “B” or higher. Companies include Antero Resources (NC), EP Energy (OP), Laredo Petroleum (NC), Oasis Petroleum (NC), Range Resources (OP), Rosetta Resources (NC), and Whiting Petroleum (U).
We see companies in this group as being the most attractive targets for Group 1 and Group 2. One theme we heard consistently at the GS Global Energy Conference earlier this month is that management teams are willing to pay up to be in the “cores” of shale plays vs. buying “fringier” acreage at discounted prices. While this theme is not new, we believe it is even truer at $50/bbl WTI.
From a seller’s perspective, we believe the rationale for strategic combinations has also changed. Group 3 companies are the ones that have accumulated strong assets at the expense of limited financial flexibility. Facing likely negative ABL revisions and an unsecured HY E&P debt market that is essentially closed, we believe management teams that were previously committed to corporate independence may reconsider their options.
In short we believe the “bid/ask” spread for Group 3 has shrunk, and, as a result, we view this group as being the current sweet spot for E&P credit investors. At an average yield of 7.5% and bonds typically trading in the low/mid-$90s, we see potential for double digit returns if our $65/bbl WTI oil price in 2016 plays out. However, we do not see the same downside risk as in Group 4 below if crude remains lower for longer.
Group 4: Weak balance sheet/weak assets
This group includes companies with leverage above 2.5x and assets we rate “B-“ or lower. Names we highlight are Approach Resources (NC), Exco Resources (NC), Goodrich Petroleum (NC), Halcon Resources (IL), Magnum Hunter (NC), Midstates Petroleum (NC), Rex Energy (NC), Sabine Oil & Gas (U), Samson Investment (NC), Sandridge Energy (IL), and Swift Energy (U).
We view management teams in this group as facing the most difficult decisions. Given the general lack of “core” assets, we believe strategic interest from a larger acquirer is less likely than for Group 3. Furthermore, with the bonds in this group generally trading below $80, we believe 101% change of control provisions act as de facto “poison pills” for acquirers.
Given high leverage and the lack of strategic interest, we believe many companies will need to seek alternative sources of capital. While the options here will vary case by case, we note that most of these names have secured debt baskets that can be used to bolster liquidity. Based on the phone calls we receive, investor interest in this type of security remains high, which suggests to us we will see robust second-lien issuance as soon as the conclusion of 1Q earnings. The bottom line is that, for now, we think investors should tread lightly in this group, despite the average bond yield of 19% (excluding obviously distressed names Swift Energy, Samson Investment, and Sabine Oil & Gas).
Worth noting: the above is actually an optimistic baseline:
Our ratings are predicated on a $65/bbl WTI oil price in 2016. While we believe the consensus largely shares this view, there are clearly risks to the downside. Therefore – and all else being equal – we believe investors should prefer names with lower base portfolio decline rates. On average, we believe lower decline names will have more flexibility to cut capex and hibernate while waiting for an eventual recovery in prices.
And here is the backup data used by Goldman to justify the blessing (or curse) of any one given company in its quadrant.
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We have never been more energy independent. Obama said so. The ecomony is doing great. If Goldman is putting up a sell signal, I'm buyin.
Check back in 3-4 months. Group 1 will be the new group 4, the last and only group still standing.
"I wants a Swirl-O-Gram. Deez boxeses too hards ta fallas."
- Newest EEOC Representative at Citibank
dup....second quarter
Wake me when Goldman ends up on one of Goldman's bankruptcy spread sheets.
Here is the Cimarex well next to mine, they have some big laterals scheduled for this spring just south and west of me. Pretty good well, has made in excess of $20m in just a year. Note it's decline rate is 50% on oil and 40% on gas, that's not what people are claiming in the articles on this site. This well is in the Wolfcamp.
http://tinyurl.com/lm99oo
Ain't that nice of Goldman. They want us to short the companies in group 4 so they can pump and dump it, roasting shorts along the way.
Except for 2 idiots, the majority of ZH readers astutely figured out the various ramifications of this earlier this afternoon
http://www.zerohedge.com/news/2015-01-23/us-oil-rig-count-craters-lowest...
"roasting shorts"?
do skidmarks matter?
or just add flavor?
Another new Ben & Jerry's 2016 flavor: Fruity Unicorn Skidmarks
What gets to me is their assessment of Cheseapeake. This is the original shale play, which generated massive negative cash flows and is incapable of making an economic profit from its non-core assets, which have no value and will have to be written down. With so many cheap conventional players out there I have no idea why anyone would take the risk of buying overvalued shale players now even if my own assessment is wrong.
Shit! I own stock on several of those.
Like a BK filing is bad for the company? Let's see, pay your debt at pennies on the dollar, or not at all, cornhole your creditors, then start up again with no debt like nothing happened?
Don't see the downside.
The Donald REALLY needs to be POTUS
DXY @ 95
crash at 120
OPEC production numbers are interesting.
The Saudi's have been drilling their ass off to keep production flat.
http://peakoilbarrel.com/opec-crude-oil-production
Which kinda puts in kink in that ole Saudis vs. the world meme.
No one can escape the ramifications of a hyper-financialized world.
Malinvestment 101
What ever happened to organic growth?
like the "green shoots"
wilted on the vine..
Wow, Goldman has a lot weirder definition of what makes a healthy company than I do. Looking at annual data on yahoo finance, in 2011-2013, Chesepeak made $13.3B in operational cash flow and spent $36.8B in capital expenditures. When you have to spend $37 billion to make $13 billion, that's not a company I want to own.
You should see their campus on Oklahoma City.
35D32'07"N
97D31'40"W
Chesapeake is in Group 1? No doubt the apocalypse is nigh.
Yes. A fundamental analysis matix that hangs on to functioning markets. This does not hold anymore. Survivors shall be those who will be bailed out through State or Federal schemes.
GS (an insider) may just be betting that their picks in this initial round are the likely too important to fail group. This is not forgetting generous investment credits for foreign firms in the bail-outs to be negotiated by GS.
The question I have is how DE Shaw, Larry Summers and Jim Mogg make out.
As long as the State of North Dakota took all that windfall tax revenue and bought gold and put it in their "Bank of North Dakota" I could care less.
Wall Street will be busting down the door to rev up the lending engines if that's been the case.
So far no news. If the State started issuing gold backed bonds at interest...
What about Harold Hamm's company, Continental Resources? His ex-wife is looking for more than $1B.
Awesome article.
Excellent, I work for a company in group 4 and it's no lie, we are hedged well for 2015 but if this shit rolls too far into 2016 we will tap and max out the revolver and it's over. Good news my position is the kind that gets a nice retention bonus usually.
Can you tell us what banks are on the hook for these loans? BOKF? CFR? Two that always get mentioned for aggressive lending in the oil sector.
We're about to start exporting, right?
Goldman's Shale Matrix or how to buy for pennies on the dollar. It has been a long term strategy from the beginning.
The matrix reminds me of their housing stock recommendations right bedfore the collapse.
I think it would be interesting if Goldman could extend the research to look into the companies that work with these types of companies. (non E & P players)... too see if which other companies along the chain could be dragged down along with these guys in the event of catastophe....