"WHEN OIL WAS $100 A BARREL, EVERYONE LOOKED LIKE A GENIUS."
Key to Surviving the Oil Bust: Beware Bankers Bearing Cheap Debt
Carolina Wilson and Asjylyn Loder bloomberg.com January 25, 2016 — 6:01 Updated January 26, 2016
- Just saying `No' to easy money made Diamondback a winner
- Diamondback one of just four producers that gained in 2015
He didn’t bite, not even when equity analysts groused that Diamondback Energy Inc. would grow a lot faster if he’d just spend more of other people’s money.
“We had bankers with wheelbarrows of cash that were coming up the elevator saying, ‘Hey, here’s debt, take it on,’" said Stice, chief executive officer of Diamondback.
Today he heads one of the best-performing oil producers in the country. Diamondback rose 12 percent last year while crude fell 30 percent. Moody’s Investors Service raised the company’s credit rating in 2015, one of only 10 oil and gas firms to earn that distinction. It’s vindication for a company that resisted the junk-bond binge that fueled many competitors.
“In hindsight, it really looks like a good decision," Stice said. "Had we not done that, we would be parked with a lot of debt on the balance sheet right now, and quite honestly, we might not be able to survive.”
Of the 61 members of the Bloomberg Intelligence North America Independent explorers and producers index, Diamondback is among just four that gained last year. The others were PDC Energy Inc., Newfield Exploration Co. and Parsley Energy Inc. They all avoided loading up on cheap debt.During the boom, investors poured money into shale. While the high-yield bond market doubled in size from 2004 to 2014, the amount issued to exploration and production companies grew 11-fold to $112.5 billion, according to Barclays Plc.
“The high-yield debt markets were pretty benign and people weren’t expecting prices to fall the way they did,” said Arvinder Saluja, a senior analyst with Moody’s.
High crude prices made the traditional methods of measuring an oil company’s debt burden misleading, Saluja said. Earnings swelled as crude prices rose, making drillers appear healthy even as ballooning debt left them increasingly vulnerable to a downturn. Saluja looked instead at retained cash flow compared with how much companies had borrowed.
By that metric, a handful of producers stand out. Along with Diamondback, there’s Pioneer Natural Resources Co., EOG Resources Inc., Matador Resources Co. and Cimarex Energy Co., according to data compiled by Bloomberg from third-quarter 2015 financial statements.
“The best-performing E&P stocks have the rare combination of production growth and low net debt with little to no outspending,” said David Beard, managing principal of Coker & Palmer, a Jackson, Mississippi-based company offering securities brokerage and financial planning services.
West Texas Intermediate for March delivery climbed 30 cents to $30.64 a barrel on the New York Mercantile Exchange at 9:47 a.m. Tuesday in New York.
Selling Oil
PDC Energy, a company focused on developing the Wattenberg field in northern Colorado, ticked all those boxes. It was one of only 16 companies in the Bloomberg Intelligence index to earn more selling oil and gas than it spent on drilling in the third quarter, according to data compiled by Bloomberg. The company was the top performer last year, gaining 29 percent.
Newfield, which gained 20 percent, owed its success to its shale acreage in southern Oklahoma, said CEO Lee Boothby. The company raised money by selling equity instead of debt, and its total debt at the end of the third quarter was 17 percent lower than the year before.
“Our focus on the debt side has been pay down debt,” said Boothby. “It was just a smart financial move and it sets us up well for weathering the storm.”
PDC didn’t respond to several calls and e-mails seeking comment.
Parsley CEO Bryan Sheffield said the company’s Wolfcamp well performance helped the company see 40 percent production growth in 2015.
Saying ‘No’
Saying no to debt is a lesson Stice learned at the start of his career during the bust of the 1980s. He still keeps a stack of 30-year-old job rejection letters. He figures there are about 40. Finding a job wasn’t easy for a newly minted petroleum engineer in 1985. Oil was plummeting and wildcatters all over town were selling their planes and boats, even pulling their children out of expensive private schools.
If that downturn is a guide, only the companies that avoided debt during the boom will survive as oil dips below $30 a barrel, he said.
“When you have an experience like that as a young man in your 20s, it makes you debt-averse,” says Stice. “When oil was $100 a barrel, everyone looked like a genius.”
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Replies to This Discussion
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Permalink Reply by Paul Butler on
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After reading your post, I couldn’t believe Newfield made money.
My immediate reaction was it had to be hedges and/or asset sales.
I checked their November 2015 BOA presentation. Sure enough, it highlights hedges and asset sales.
My memory tells me they have their finger prints all over much of the misadventure and many of the fools’ errands we’ve witnessed the last 10 years.
GHS members should read the Income Statements and Balance Sheets for last quarter and 2015 of the Players in their areas so that they have an idea who is likely to be around this time next year.
I hate to sound like a crank all the time; however, I want to see some reform come out of the collapse of the Oil & Gas Industry. Reform, to me, would include different people in charge next time.
The apotheosis of the Okies, and they know who they are, was the first wrong turn.
Many of the charlatans, dilettantes, ne’er do wells and interlopers (riff raff) could be weeded out if the mineral owners would refuse them 180 day drafts (business days).
What happened to 7 or 30 day drafts or a certified bank check upon request (no problem)?
They would have to use real landmen to do that. The temptation to use family members, friends, mistresses, et al is strong-- so that’s probably not going to happen.
I read an article, last week in a financial journal, wherein the author summed up the Shalies with the declarative sentence: First they abandoned fundamental business principles/practices, then they abandoned reason altogether.
2016 is going to be one for the record books.
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Permalink Reply by Skip Peel - Mineral Consultant on
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There's plenty of good reasons to be cranky, Paul. Specifics are always welcome and tend to inform the membership.
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Permalink Reply by Paul Butler on
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Off the top of my head, this is what chapped my ---:
Year after year spending more than generated;
Loading up on debt;
Acquiring acreage they have no reasonable expectation of drilling;
Failure to have a plan in place to deal with the current situation (businesses are supposed to be prepared for the future, come what be. If you need excuses or to point to competitors failures, you no longer qualify as a respectable business);
Paying too much for debt;
Incurring too more debt when they knew the jig was up;
Too much speculation/white knuckle gambling;
Abusing Royalty holders;
Reneging on deals;
Stiffing and cramming down creditors;
Dishonesty with landowners and the public in general;
Cutting corners;
Using unqualified people who are the cheapest cause they have to get the bankers their pound of flesh;
Hoodwinking gullible Banks and Bankers;
Get your Google going to see specific instances.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Quite a list. For the bulk of GHS members who are mineral owners can you expand on the following topics from your list? The first one is kind of puzzling but the others have been discussed here many times.
Acquiring acreage they have no reasonable expectation of drilling;
Abusing Royalty holders;
Reneging on deals; (if indeed the reneging relates to leases)
Dishonesty with landowners and the public in general;
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Permalink Reply by Paul Butler on
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I forgot:
Land Grabbing;
Claim Jumping;
Cronyism/nepotism;
Hogs at the Troughism
Skip, that kind of research is one thousand dollars per hour, with a 20 hour min.
Skip, I would need that money up front. Do you have the money Skip? If you have the money, we can get started.
I didn't think so.
For specific examples of the foregoing, please see the following (gratis for my friends):
http://www.oilandgaslawyerblog.com/
http://gomarcellusshale.com/forum/topic/listForContributor?user=2yc...
I'm not trying to prove anything here and I have no such duty. I'm raising issues in the Public Record for the consideration of my friends here on GHS. Readers are free to believe what they want. I'm trying to provide information so that people may make more informed decisions and, hopefully, do some research and become smarter.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I don't think your rates will get you any business here on GHS, Paul. If your intent is simply to vent that is allowed. Knock yourself out.
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Permalink Reply by Paul Butler on
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Skip, It was supposed to be humor.
To tell you the truth, I don't see many footnotes in anybody's comments.
I don't want to be held to a double standard.
The President said to be wary of double standards.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I think you need a little more practice on that humor thing, Paul. I'm not referring to a need for footnotes. I'm suggesting an expanded explanation that may actually be understandable and helpful to mineral owners, leased and unleased.
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