In the introduction to the series on Monday, I argued that the fall in prices has been a distraction that masked the real issue- which is balance sheets.  Low interest rates on the heels of the 2008 financial crisis, coupled with historically high commodity prices led to a huge liquidity infusion into O&G balance sheets.  Today, we examine magnitude of the issue. 

With thanks to my new friend Michael Kelly, CFA, Seaport saved me the effort of manually creating all the comps for public E&Ps to make the point in today’s post.  You can find this link in the comments. The columns I was most focused on were 2019 D/EBITDA and 2019 capex/FCO %.  Comps aren’t a great way to value companies, but it’s a good snapshot.

Debt to EBITDA remains staggering after 3 years of ‘discipline’.  Some may argue that even if some could sell an asset, it could be ‘fraudulent conveyance’- a deeply legal and terrifying phrase.

And worse, slowing down rigs and letting production decline means that the Debt: EBITDA ratio can actually climb by stopping drilling!  Which means banks default loans and companies are forced into restructuring.

So the ‘what did I miss?’ question I posed this week is answered- some companies can’t drop rigs without risking leverage ratios.

#hottakeoftheday