Oil prices are up in recent weeks. And prices of oil producers are up with them.
But there’s still more pain in store for the oil patch.
Consider the overall state of the industry… Despite their rise, oil prices are still near $40 a barrel. A few years ago, if you predicted that, people would have laughed you out of the room. Prices are still so low, producers are starting to go bankrupt.
[ad#Google Adsense 336×280-IA]Since the start of 2015, 64 oil and gas companies have filed for bankruptcy.
They include well-known firms like Energy XXI (EXXI) and Goodrich Petroleum (GDPM).
And the pace of filings is increasing.
Texas law firm Haynes & Boone, which services many oil companies, says 42 energy companies filed for bankruptcy last year.
Less than five months into this year, we’ve already seen 23. At the current pace, bankruptcies will be up nearly 75% this year.
Believe it or not, this increased pace is a good thing…
It’s good because it’s necessary. Last July, I explained that the initial filings we had seen at that point were just the beginning…
Between 2003 and 2011, the price of crude oil rose from about $20 per barrel to more than $100 per barrel. At that price, expensive oil all over the world became economic – miles deep under the ocean, under the frozen seas of the Arctic, and even trapped in shale rock.
Areas like south Texas’ Eagle Ford Shale and North Dakota’s Bakken Shale exploded in growth. Producers, including just-bankrupt Sabine Oil & Gas, borrowed money to start drilling in these areas. Now, with today’s low oil prices, many of these companies have high levels of debt that they can’t pay back.
As I predicted, the bankruptcies were unavoidable.
Bankruptcies will help cleanse the market of higher-cost assets… or put them in the hands of more productive operators. So the companies left will be more efficient… and able to focus on rewarding shareholders. This means investors will have better options to choose from. And we’ll see a bottom in these stocks.
The increase in bankruptcies – and the production transfer from weaker companies to stronger ones – means we’re closer to a bottom in oil prices.
When bankruptcies start to slow their pace, that will show us it’s time to buy.
When that happens, the highest returns will come from the companies that operate efficiently but still carry debt. You see, the market has left oil and gas companies with debt for dead, including those with manageable debt loads. The biggest gains will come from those companies, as investors have overreacted and pushed their shares down the most.
Now is the time to put together a wish list of companies to own when oil prices start to climb for good. Look for companies with…
1. High cash balances compared to their debt levels,
2. The majority of their debts maturing at least three years from now, and
3. Low production costs.
One company that fits the profile is Denver-based oil producer Cimarex Energy (XEC). After a recent move higher, it’s still down 27% from its 2014 highs. Cimarex holds cash equal to more than half its total debt and produces oil efficiently. Half of its debt matures in 2022 (the other half matures in 2024).
Look for Cimarex to continue to benefit as the oil outlook brightens. Consider buying shares today.
Good investing,
Brian Weepie
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Source: Growth Stock Wire