While the oil market isn't in full rebound mode yet, it's in much better shape than it was early last year when producers were sinking into bankruptcy on a seemingly daily basis. That said, while industrywide bankruptcy risk has subsided, several companies remain in danger, including Pengrowth Energy Corporation (NYSE: PGH), Denbury Resources (NYSE: DNR), and Baytex Energy (NYSE: BTE). Here's a closer look at whether this trio might sink all the way to that bottom.
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Notable progress but more needed
Pengrowth Energy's stock has gotten shellacked this year, plunging more than 50% since January. That pushes the Canadian oil producer's value down roughly 90% over the past three years. The primary issue weighing on the stock is the company's weak financial situation, which has it dangerously close to breaching its financial covenants. During the second quarter, for example, its debt-to-adjusted EBITDA ratio was 2.7 times versus a maximum permitted level of 3.5 times while senior debt to book capitalization was 50% against a maximum of 55%.
That said, Pengrowth has worked hard to gain some more breathing room by selling a slew of assets. Since the start of the year, the company has sold 827 million Canadian dollars' ($682.2 million) worth of assets. When combined with its cash on hand, net debt has fallen by CA$1.1 billion ($910 million), which is 66% less than it was at the start of the year. In addition, it has reached an agreement in principle with a group of creditors to relax its financial covenants for the next two years. Pengrowth isn't out of the woods just yet, though, which is why it's considering additional asset sales as well as looking at its refinancing options to replace its existing debt with less restrictive funding so it can stay afloat.
Denbury Resources has taken a similar beating. The enhanced oil recovery specialist's stock is down a gut-wrenching 70% this year and 93% over the last three. Again, the weight of debt is the primary culprit. One of the biggest recent concerns is the rise in borrowings under its bank credit facility. As of the end of June, Denbury had used $490 million of its $1.05 billion capacity, which is a $189 million increase from the beginning of the year because it outspent cash flow on capital expenses, made an acquisition, and repaid some nonbank debt. However, according to the company's estimates, as long as oil remains in the upper $40s this year, it should generate enough cash flow to get borrowings down to a range of $425 million to $475 million by year-end, leaving it with more than $500 million of liquidity.
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Given those projections, the company is confident that it can stay afloat. That's evident from comments by CEO Chris Kendall, who stated in last quarter's earnings release that he believes his team is "moving this unique company in the right direction." Furthermore, he said that he thinks that "Denbury holds significant value not recognized by the market," which is why a key focus going forward will be to bring "this unrecognized value to light."
Slowly starting to turn
Baytex Energy's stock, likewise, has gotten slammed this year, falling nearly 45%, which brings its three-year slump to almost 94%. That said, the Canadian oil company seems to be turning the corner. Production was up 5% last quarter and has risen 12% since the end of last year thanks to the restart of its Canadian development program. The company was also able to deliver this growth while mainly staying within cash flow, which is what it expects to do going forward.
Meanwhile, net debt has fallen by CA$123 million ($101.5 million) over the past year to CA$1.8 billion ($1.5 billion), due in part to the recent strengthening of the Canadian dollar, which has had a positive impact on its U.S. dollar-denominated debt. Consequently, the company remains well within its financial covenants. Furthermore, while its $575 million credit facility matures in less than two years, it's about two-thirds undrawn and the company's first meaningful long-term note maturity isn't until 2021. These factors suggest that Baytex should be able to stay afloat unless crude crashes again and stays there for a few years.
That sinking feeling is starting to diminish
Of that trio, Pengrowth Energy appears at greatest risk of sinking if crude prices remain weak and it doesn't make any further improvements to its balance sheet. That said, the company bought itself some time and breathing room this year, which increase the likelihood that it will stay afloat. Still, even with the decreasing possibility that these three oil stocks will sink, none are in the clear just yet, and that is why investors are better off staying away for the time being.
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