The Curse of Cheap Credit | Russell T. Rudy Energy LLC
There is an old saying that leverage is a two edged sword: it makes good times look better, and bad times look worse. When oil prices were strong and the sky seemed the limit, using other people’s money appeared to make sense. From 2004 to 2014 the high yield bond market doubled, but for oil and gas exploration and production (E&P) companies, it increased 11 fold. However, when crude prices collapsed, many of these companies were saddled with high loan payments that did not fall in tandem with revenues. They are now engaged in an existential struggle.
A recent article in “World Oil” relates that of the 61 companies which compose the Bloomberg North America Explorers and Producers Index, only 4 increased in value last year. Not surprisingly, all of them avoided loading up on cheap credit. Consequently, Diamondback Energy Inc., PDC Energy Inc., Newfield Exploration Co., and Parsley Energy Inc. are well positioned to weather the storm facing the industry.
Diamondback is one of the best performing producers in the U. S. Due to its financial prudence it rose 12% in value last year as crude prices fell. In fact, Moody’s Investor Services raised the company’s credit rating in 2015, only one of 10 E&P operators to be so recognized.
PDC concentrated on developing the Wattenberg field in northern CO, and still managed to earn more oil and gas revenue than it spent on drilling. Consequently, it was the top performer in the Bloomberg Index last year, gaining 29% last year.
Newfield successfully developed its shale reserves in southern OK, but financed this effort through selling stock rather than borrowing money. Consequently, its debt burden at the end of the third quarter of 2015 was 17% lower than the year before.
Parsley exercised financial restraint while concurrently increasing well performance in the Wolfcamp play of the Permian Basin of West Texas by 40%.
Sound financial stewardship was not confined to just these 4 operators. Pioneer Natural Resources, EOG, Matador and Cimarex all resisted the siren song of cheap credit and accordingly appear well positioned to service debt even in the uncertain times ahead.
Apparently old sayings survive to become old because they are valid.
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/01/26/key-to-surviving-the-oil-bust-beware-bankers-bearing-cheap-debt .
