3 Oil Stocks in Deep Water -- And We're Not Talking Offshore Drilling

By Markets Fool.com

Warren Buffettfamously quipped "Only when the tide goes out do you discover who's been swimming naked." Well, the tide of high oil prices went out late last year. Now,investors are findingout which oil companies were using those high prices to cover their backsides. Here are three oil stocks whose weaknesses have been exposed and nowcould bein deep trouble.

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Tyler Crowe: I got a pretty good chuckle from a statement made by Magnum Hunter Resources' CEO Gary Evans during the company's investor update. Basically he said that the company wasn't going to spend anything on drilling new wells until oil services costs came down to a level that was in line with the drop in oil prices to make it worth a producers' while to go drill. The statement sounded bold and brazen which is pretty prototypical of the wildcatter-type personalities that have emerged in this shale revolution.

If you look at the company's balance sheet, though, then that statement should probably read "we won't spend anything on new wells because we aren't generating any operational cash flow and are going to really struggle to pay off the interest on our massive pile of debt". According to the company's most recent quarterly report, cash flow from operations was negative, meaning that it took more capital to keep the lights on than what it brought in. At this rate, the company will need to either sell off large portions of the company or issue equity just to pay its interest expenses.

Don't let the blustery tone fool you, Magnum Hunter's finances are in dire straits and its decision to halt drilling activity is a much larger factor in that than what the CEO suggests.

: Many investors have focused solely on U.S. energy companies and the hit they've taken from the drop in crude oil prices. But for some international players, the impact has been even worse. For Brazilian state-owned oil giant Petroleo Brasileiro , a host of pressures have hammered the stock's price and led to questions about its future return potential for shareholders.

On top of all of Petrobras' oil-price woes, the company finds itself in the middle of a corruption probe. Even Brazilian President Dilma Rousseff, who served as chair of the company from 2003 to 2011, has gotten caught up in the controversy, with allegations that she should have stopped systematic bribes that Brazilian prosecutors say that Petrobras suppliers paid to get lucrative contracts and funneled money toward political parties. With one former executive admitting to taking bribes for 18 years, shareholders are now questioning whether the company's business model itself is viable, calling for reforms that make Petrobras management more accountable to private interests while still respecting the government's majority stake in the business.

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With the heavily indebted company having seen its bond rating cut to junk status, Petrobras shares are down 75% just since September. Even higher oil prices wouldn't necessarily solve all of the company's woes, leaving many to write off Petrobras as a lost cause even at bargain prices.

: After listening to SandRidge Energy's fourth-quarter conference call I came away with one conclusion: This company isn't built to last. As a shareholder in the company that's a pretty disappointing conclusion to arrive at after listening to management's plan to make it through the downturn.

There were two things management said that really irked me. First, CEO James Bennett said on the call thatif the current oil price was the new normal, the company would "probably want to remove $1 billion of debt from the balance sheet," which is almost a third of the company's debt. That's a daunting task in a strong market -- the company's original plan called for three years of hyper growth at $90 oil to grow into its balance sheet -- and a nearly impossible task at sub-$50 a barrel oil.

The other issue I have is that the company is actually planning to slip even deeper into debt by outspending its cash flow again this year by a few hundred million dollars. It's plan is to sell assets and use its severely shrunken cash balance to bridge the gap. What worries me is that the company is on borrowed time as its already limited cash flow could fall even further off a cliff next year after its oil hedges run off.

While the company isn't a bankruptcy risk, yet, its not heading in the right direction. My patience iswearing verythin and if I don't see any improvement by the end of the year I'll probably jettison SandRidge from my portfolio.

The article 3 Oil Stocks in Deep Water -- And We're Not Talking Offshore Drilling originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. Matt DiLallo owns shares of SandRidge Energy. Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.