Bankruptcy

[dan_s]

I attended a luncheon panel discussion on bankruptcy today. A lot of sad faces in the crowd of close to 100 (except for the stinking lawyers).

We will see a lot of Oilfield Services firms filing for Chapter 11 protection this year, BUT we won't see a lot of upstream companies force to. The main reason is that the upstream companies can slash drilling budgets and live within cash flow. Even at $30/bbl oil there is still positive cash flow from operations. All in cash lifting cost (including LOE, gathering, processing, transportation, productions taxes) run in the $8 to $15 per boe range. As long as the upstream companies generate enough cash flow to cover G&A + interest expense they can survive.

Oilfield Services firms are in Big Trouble. The lower the active rig count goes the worse it will get. Their revenues have been slashed and their equipment is worth pennies on the dollar. For example, frac tanks are now selling for less than 10% of original cost. 2/3s of drilling rigs and frac equipment is now stacked. Many of the older rigs will be sold for scrap. All they can do is fire more people and cut costs where they can. The main problem is that a lot of the equipment they use is financed or on lease programs. The big firms like HAL and SLB will survive and gain market share.

Most of the midstream companies will survive. We still need to gather, process, transport and store the crude, NGLs, gas and refined products. OKS and PAA really look cheap to me. They have both publicly said they plan to hold distributions flat this year. U.S. production is falling, but we will just import more.

Most of the upstream MLPs that are well hedged through 2016 should survive.

Refiners are coming off one of their best years ever.

Accounting rule for upstream companies SUCK and are very misleading to most investors. Reported earnings, which include big non-cash items and very confusing "mark-to-market" adjustments on hedges, are worthless.

CASH IS KING. < Say this at least three times

Focus on "Cash Flow From Operations". As long as an upstream company can pay the vendors and the interest on their debt they will survive the cycle. Banks do not want to force their clients into bankruptcy. Only the lawyers win in bankruptcy and the bankers know it.

This is why I always value companies based on cash flow per share and not EPS. On all of the forecast models on the EPG website, I clearly set out cash flow from operations and I now include a table that shows what First Call has for cash flow per share. It is not on Yahoo Finance but E-Trade does give it to you.

Also, I am now getting calls from at least one VC firm per week that is looking to buy upstream assets. This is a good sign. These are firms with $Billions and their research teams are telling them that we are nearing the end of the cycle. Russ Porter, CEO at Gastar, told me that he received calls from ten VCs within a couple hours of announcing the results of their STACK test well.

[bearcatbob]

"Also, I am now getting calls from at least one VC firm per week that is looking to buy upstream assets. This is a good sign. These are firms with $Billions and their research teams are telling them that we are nearing the end of the cycle. Russ Porter, CEO at Gastar, told me that he received calls from ten VCs within a couple hours of announcing the results of their STACK test well."

IMO the absolute last thing any of us who have loss positions want is a cheap takeover. The prospect of recovery is substantially dimmed if some of our favorites are bought out at 2X current prices. IMO take overs are the absolute last thing we want today.

[dan_s]

There is always a lot of consolidation at the end of these cycles regardless of what we want to happen. The reason that I say it is a "good sign" is because that process marks the end of the cycle.