With the topic of distress among U.S. oil and gas exploration and production companies becoming more important with every passing day that oil not only continues to drop, but certainly fails to rebound to levels that allow US energy companies to return to a cash flow positive state, we would like to show just how much debt is at stake.
To do that, drawing inspiration from a tweet by J Pierpont Morgan, we have conducted a quick CapIQ sort through all US energy companies - both public and private - that have at least $100 million in annual revenue, and whose EBITDA less CapEx was a negative number in the LTM period.
To be sure, this gives listed companies the benefit of not only higher EBITDA in the early quarters when the drop of oil was not as severe, but also of oil price hedges. As such as the true negative cash flow going forward assuming no rebound in the price of oil for the foreseeable future will be far worse as the benefit of the base effect dissipates with every passing quarter and as oil price hedges, which have so far cushioned the oil price blow, are unwound.
Here are the results:
- There are roughly 80 U.S. companies that had $100mm in LTM revenue and that had negative FCF or EBITDA less CapEx.
- The combined market cap of these 80 companies is just shy of half a trillion dollars.
- The combined Total Enterprise Value of these 80 companies is $775 billion.
- The combined debt of these 80 companies is $325 billion.
None of these companies are bankrupt, yet. As a reminder, putting as many of these companies out of business, and thus slashing non-OPEC oil production (as OPEC forecasted in its latest bulletin earlier today), is the primary motive behind Saudi Arabia's relentless pumping spree.
There is just one problem with the Saudi plan: even assuming all of these companies file Chapter 11, all that would happen is their debt would be wiped out, with the existing creditors getting the equity keys, and becoming the new owners of streamlined, debt-free corporations. This would means that the All In Cost Of Production would plunge as no debt payments would have to be satisfied with the free cash flow. Meanwhile, the entire existing E&P infrastructure would still be in place and ready to pump as before.
This means that after the default and debt-for-equity deluge, US shale would be able to pump even more at far lower breakeven costs, forcing Saudi Arabia to overproduce for even longer ultimately shooting itself in the foot when its reserves run out!
Of course, none of this is any comfort for those who have exposure to the pre-petition debt, which may explain why various regional Feds are suddenly so very defensive when it comes to US banks and other lenders who are on the hook when the default tsunami finally hits.