Southwestern Energy Might Have Difficulty With One Of Its Debt Covenants At The End Of The Year

In my two most recent articles, I described how anyone considering an oil and gas investment right now must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

In an earlier article, I answered the first question for Southwestern Energy (SWN). I described how the company looks cheap when you compare its enterprise value to the value of its underground oil and natural gas reserves.

In my last article, I began answering the second question for Southwestern. I looked at how the company’s hedging contracts might affect its estimated 2020 revenues. By estimating the company’s revenues for this year, we can see if the company will earn enough to service its debts.

There are two areas of concern here:

1. Will the company have enough earnings to cover its interest expenses?
2. Will the company have enough earnings to meet its debt covenants?

If Southwestern can answer “yes” to both questions, it is likely to survive the current downturn, at least through the end of 2020. If the answer to either question is “no,” the company’s survival will be in the hands of its creditors. (Read More)

A Look At Southwestern Energy's 2020 Hedges

In my last article, I described how anyone considering an oil and gas investment right now must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

In that article, I answered the first question for Southwestern Energy (SWN). I described how the company looks cheap when you compare its enterprise value to the value of its underground oil and gas reserves.

To answer the second question for Southwestern, we need to know if the company will earn enough this year to service its debts. There are two areas of concern here:

1. Will the company have enough earnings to cover its interest expenses?
2. Will the company have enough earnings to meet its debt covenants?

If Southwestern can answer “yes” to both questions, it is likely to survive the current downturn, at least through the end of 2020. If the answer to either question is “no,” the company’s survival will be in the hands of its creditors.

To calculate Southwestern’s 2020 earnings, we need to look at the company’s price hedges. Those hedges are meant to protect the company from oil and gas price declines, and may be key to giving the company enough earnings to service its debts. Only if we know the impact of those hedges on the company’s revenues will we be able to calculate the company’s earnings. (Read More)

A Look At Southwestern Energy's Reserves

With the recent fall in oil and gas prices, many investors are looking for bargains in the industry. One company that has drawn interest is Southwestern Energy (SWN).

For an oil and gas company such as Southwestern to be a good investment right now, I think it must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

Answering the first question tells an investor if they might earn above average returns by investing in the company. Answering the second tells an investor how likely it is they will earn those returns, rather than losing most or all of their money.

To answer the first question for Southwestern, we will compare the company’s enterprise value to the value of its underground oil and gas reserves. (Read More)

Occidental Petroleum Is Even More Expensive Relative To Its Reserves Than I First Thought

For my 30th Seeking Alpha article, I revisit Occidental Petroleum by taking another look at the company's valuation relative to its reserves:

In my recent article “Occidental Petroleum is Surprisingly Expensive Relative to Its Reserves,” I compared the company’s enterprise value to the value of its underground oil and natural gas reserves. I then made the same comparison for several other large oil companies. Even though Occidental Petroleum (OXY) is much riskier than those companies due to its high debt levels, its enterprise value to reserve value ratio was not much cheaper.

In calculating Occidental’s enterprise value in that article, I left out Occidental’s roughly 10 billion dollars in preferred stock. Warren Buffett (BRK.A) (BRK.B) bought this stock to help finance Occidental’s August 2019 acquisition of Anadarko Petroleum, and I only noticed my omission while writing my follow-up article “A Valuation of Occidental Petroleum Based On Its Three Sources of Value.”

Fortunately, including that preferred stock in the calculation doesn’t weaken my original thesis. It actually makes it stronger. My original thesis was that the company's enterprise value to reserve value ratio was surprisingly high, and now it's even higher. This article will look at that revised EV/Reserves ratio and compare it to the EV/Reserves ratios of some other integrated oil companies, taking into account the various companies’ share price changes in the past three weeks. In doing so, we will see how expensive Occidental Petroleum is now compared to those other companies. (Read More)

A Valuation Of Occidental Petroleum Based On Its Three Sources Of Value

Of the companies impacted by the recent oil price collapse, Occidental Petroleum’s (OXY) story might be the most dramatic. The company bought Anadarko Petroleum in August 2019 to become America’s fourth largest oil and gas company. Since then, its shares have fallen by over 60%, in part due to concerns over the debt the company took on for that deal. Even the company's bonds have collapsed. Occidental’s bonds due in 2049 have dropped by over 50% in the past year. Such low prices imply many bondholders think the company will go bankrupt.

Of course, not everyone feels so negatively about the company. Six “Bullish” or “Very Bullish” articles were written about Occidental on Seeking Alpha in March alone, and three more in April. After all, much of the fall in the company’s shares has been caused by the recent oil price collapse. If oil prices go back up again, it is plausible that investors who buy now could triple their money. It's also worth noting that both Carl Icahn (IEP) and Warren Buffett (BRK.A) (BRK.B) are invested in the company, which gives even more impetus to whose who think that the company will do well as an investment.  

With so many diverging opinions about Occidental’s future, I think it is important to remember the company’s fundamentals. Occidental has three sources of value...(Read More)

Occidental Petroleum Is Surprisingly Expensive Relative To Its Reserves

In my recent article “Drilling for Oil in the Stock Market,” I compared the enterprise values of the oil “supermajors” to the value of their reserves—the oil and natural gas they own underground.

A company’s enterprise value is the value of all the money invested in the company by both shareholders and lenders. It equals the company’s market capitalization, which is what all its stock is worth, plus the face value of its debt minus the company’s cash (also known as its “net debt”).

Enterprise value is a good metric to compare to an oil company’s reserves because ultimately, both lenders and shareholders have a claim on the company’s assets, including those reserves. This is particularly important if the company is at risk of bankruptcy. In comparing the supermajors’ enterprise values to their reserve values, I wasn’t implying they might go bankrupt. Rather, I wanted to see how an acquirer might appraise them. However, there is a major oil company which is in financial difficulty—Occidental Petroleum (OXY). (Read More)