Saturday, February 21, 2015

Comment On E&Ps and Service Companies

A correspondent writes,

"This is from the Dead Companies Walking blog. I’m seeing evidence of this in the companies that I own puts in. The drillers and service cos have started to roll over again, both stocks and bonds for the most part, but the E&P names like EXXI and GDP are not. May also be starting to see some differentiation in the E&P names – weaker ones are starting to roll back over while some of the other near dead like SD are still gaining altitude. May be time to take another look at them and some of the other service companies that weren’t quite as distressed on the first pass through.

'Every executive we spoke with said the big loser in a long-term lower-price environment would be oil service companies, as E&P firms are already demanding, and getting, lower prices for drilling rigs, as well as 25 percent or greater price cuts for supplies like frac sand and drilling mud and services like downhole engineering work and pressure pumping.

So what does all this mean for investors? Even if the recent rally in prices holds, oil services companies—especially those with hefty debt loads—will probably continue to struggle. Prices for their services will remain depressed, and if their debt obligations are onerous, lower revenues and cash flows might crimp their ability to make interest and/or principal payments. That could easily lead to a rash of bankruptcies in the sector. Exploration and production companies, on the other hand, should come through the downturn in better shape and bounce back more rapidly.'"
I don't know any servicers where puts are cheap. I think the cheap bet is E&Ps that will go BK next year if they don't get the oil bounce that everyone is counting on.

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