If you think the carnage taking place in the shale oil companies is nearly over, you couldn’t be more wrong. I believe the bloodbath in the shale oil stocks has only just begun. Once we see the majority of shale stocks trading on the pink sheets as penny stocks will we finally close the book on the Greatest Energy Ponzi Scheme in history.
I first wrote about the “Disconnect” between the major oil companies share prices versus the shale stocks in my article, THE BLOODBATH IN U.S. SHALE STOCKS CONTINUES: Worst Is Yet To Come. In that article, I showed how several of the major oil companies’ stock prices had corrected back close to their highs set in October 2018. However, the shale stocks never really recovered and are still considerably lower than their peaks set last year.
Here is the chart from that article linked above:
Even though many of the shale stocks shown in this chart have seen their prices move higher since I posted it in the middle of March, they are still well off their highs. For example, Whiting Petroleum peaked at $55 in October and is currently trading at $27. Thus, it is still 50% off its peak last year. Furthermore, Oasis trading at $6.60 is still 53% off its high of $14.
However, there are some outliers like Pioneer. Pioneer hit $190 back in October 2018 and was only trading at $140 in mid-March. So, it was still well off its October peak. Although over the past month, Pioneer is now trading at $175, so it’s not too far from its previous high. While Pioneer’s share price is behaving much better than Whiting, Continental, Oasis, and Callon, I believe there is a huge “PERMIAN PREMIUM” being paid by investors who have more money than sense.
Because the Permian is the hottest thing in the shale industry currently, investors are paying a great deal more for companies drilling and producing oil in Permian. However, Pioneer’s financials aren’t really any better (actually worse… lol) than the other under-performing shale stocks. If we look at the table below, Pioneer has suffered negative free cash flow for the past eight years:
If you notice a SEA OF RED of negative free cash flow from 2011 to 2018, your eyes aren’t playing tricks on you. Since 2011, Pioneer has racked up $6.8 billion in negative free cash flow. So, why is the stock currently worth $175?? Good question. It likely has to do with the fact that Pioneer is increasing production and revenues. While Pioneer is still bleeding cash flow, investors today don’t seem to care about profits. This is the NEW NORMAL in the psychology of the “Trading-Investing Insanity” that plagues the market.
So, while the shale companies that focus mostly in the Bakken are suffering 45-50% price declines from their highs in October, those in the Permian seem to be doing much better. Even though I believe the overwhelming majority of shale companies are GARBAGE STOCKS, some, like Pioneer, have nicer garbage pale covers. And if it looks good and is increasing revenues… well, the hell with the profits… LOL.
Shale Company Stock Losses 99% Of Its Value
In doing research on my leading 16 shale oil companies, I came across some very startling information. One company that was on the bottom of the list, and rightly so, experienced a stunning 99.5% decline in its stock price since its high back in 2014. At one time, Sanchez Energy was trading over $38 a share. Can you guess what it closed at last week?
That’s correct, Sanchez Energy is now a penny stock trading at a mere 18 cents a share. What a dismal end for a shale company with so much promise, or so we thought, back at the beginning of the mightly U.S. Shale Energy Revolution. Now, some of you may say that it is unfair to compare Sanchez’s stock decline to its ultimate high. Okay, maybe you have a point. So, let’s compare Sanchez Energy stock price from its peak of $15 in 2015. By doing the math (18 cents vs. $15), we still come up with a 99% decline. Either way, Sanchez’s stock price represents my analysis of the U.S. Shale Industry… COMPLETE GARBAGE.
With Sanchez Energy trading at a mere 18 cents a share, some readers may think that this is a rinky-dink company. Think again. Sanchez Energy reported $1.06 billion in revenues last year. So, it’s not an insignificant crappy little oil company even though its share price says otherwise. Here is some relevant data on Sanchez Energy:
- Sanchez 2018 Revenues = $1.06 billion
- Sanchez 2018 Net Income = $85 million profit
- Sanchez 2018 Free Cash Flow = -$347 million (negative)
- Sanchez 2018 Long Term Debt =$2.4 billion
- Sanchez 2018 Interest Expense = $178 million
- Sanchez Current Market Cap = $17 million
While Sanchez posted an $85 million net income profit last year, the important figure was the $347 million in negative free cash flow. So, how does a company now worth $17 million in total market cap going to pay back $2.4 billion in debt? Another good question. Furthermore, Sanchez paid ten times more in its interest expense of $178 million to service its debt than what the company is worth… $17 million.
And if we look at Sanchez Energy’s free cash flow over the past decade, we will notice another SEA OF RED:
Poor Sanchez never had a chance. Ever since it jumped out of the starting gate, Sanchez Energy has been hemorrhaging money. And now, some extremely unhappy investors are holding onto $2.4 billion of the company’s debt. So, Sanchez provided a DOUBLE BLOW to the investing community. Those who held onto Sanchez stock with Dollar Signs in their eyes, got crushed, and the investors and funds holding the companies debt, will be lucky to get pennies on the dollar.
And the final deathblow to the company took place on Feb 1st when the NYSE delisted the stock as it fell below $1 a share. According to the article, Sanchez Energy Delisted From The NYSE, the company will not appeal the decision to delist the stock as I imagine the CFO realizes there just isn’t any hope for it.
Of course, this is my opinion and not investing advice. But hell, everyone is entitled to their opinion.
One last important point on Sanchez and shale oil companies. While Sanchez is indeed suffering greater percentage losses in free cash flow versus its capital expenditures (52% in 2018) compared to Pioneer (14% in 2018), the rest of the shale companies will eventually follow the same fate as Sanchez.
I calculated those percentages above by dividing the free cash flow by total capital expenditures last year. For example, Sanchez posted a negative $347 million in free cash flow. I took that figure and divided it by the total $613 million in capital expenditure to arrive at that 52% figure. I did the same for Pioneer in 2018.
So, Pioneer isn’t as much of a disaster as Sanchez… YET. And that is a very critical point to understand. I believe most shale companies will go down in history quite the same way as Sanchez. Of course, some shale companies might be bought out by larger companies or merge, but if not, the result will likely be the same.
In a future article, (7-10 days), I will be comparing Sanchez’s stock price trend to other shale competitors and where I believe the CRITICAL LEVEL will be for these stocks. Once these stocks close firmly below these levels… it’s only a matter of time before they become penny stocks.
IMPORTANT NOTE: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.