Oklahoma Inc. results demonstrate impact of energy companies' exposure to commodity prices
Investors continue to be concerned that oil and gas companies have more financial risk than other types of businesses, this year’s Oklahoma Inc. rankings show.
A year ago, about 75% of the 33 companies in the state that were traded on major exchanges were energy related.
This year, there were five fewer companies on major exchanges by the time June 30 arrived, and all of the departures were energy industry operators.
Of the 28 remaining, just 19 were involved in the energy industry as exploration and production, midstream or support operators.
Of those, only three landed spots among the best 10 Oklahoma Inc. performers for 2020.
Williams Companies, a major gatherer, processor and shipper of natural gas, turned in a strong enough performance to be seventh-best.
Blueknight Energy Partners, a company that provides integrated terminalling, gathering and transportation services for companies engaged in the production, distribution and marketing of liquid asphalt and crude oil, was the eighth-best performer for 2020.
Magellan Midstream Partners, a publicly traded partnership that primarily transports, stores and distributes petroleum products, was ninth-best.
• Chesapeake Energy, which filed for bankruptcy at the end of June. The company sought to reorganize after dropping commodity values for its production made it impossible for it to earn enough to keep lenders at bay. Before going into court, it posted a net loss of about $8.3 billion, or $853 a share, for the first quarter of 2020. Chesapeake seeks to get court approval of its reorganization plans early next year. Expectations are that its stock, currently traded over the counter under the ticker CHKAQ, could return to a major exchange after it exits its reorganization process.
• SemGroup, which merged with Energy Transfer at the end of 2019. Before shareholders of both companies approved the deal, SemGroup had posted a net loss for the third quarter of 2019 of about $5.5 million, or 28 cents per share, on revenues of about $562 million. Its loss was driven in part by lower marketing margins on crude oil it bought and sold over that three month period.
• Unit Corp., which declared bankruptcy in May and emerged from the process on Sept. 3 after having shed hundreds of millions in debt. Write downs on the value of its oil and natural gas properties and its contract drilling business led to an 2019 annual loss of about $554 million. The company hopes to issue stock it expects to be traded over the counter within the next six months.
• Roan Resources, which merged in December with Tulsa-based Citizen Energy Operating, a private company. Roan, a smaller exploration and production company, was carrying relatively high debt and was experiencing depressed share price values as it negotiated its deal.
• Chaparral Energy, which declared bankruptcy in August and emerged from the process in October as a private operator. As it prepared to head for court, company leaders stated it had released contracted drilling rigs, had stopped ongoing completion activities and was adding temporary tanks to locations to hold produced oil until prices for the commodity recovered after they collapsed in April.
Commodity values’ role
Financial pressure on energy-related companies has been slowly building over time.
While commodity values alone don’t always directly dictate successes or failures, they certainly influence companies’ abilities to provide their investors with decent returns.
The price for a million British Thermal Units (mmBtu) of natural gas in the U.S. hasn’t been at least $6 since January, 2010. In July 2019, it averaged $2.34 per mmBtu. In June 2020, its average price had fallen to $1.78.
Oil prices reached an all-time best value of $166.46 a barrel in June 2008. In July 2019, its value averaged $59.40 a barrel. After contracts for May delivery turned negative on April 20, its average value rebounded to $39.66 in June.
As commodity values have trended lower, many energy companies have been forced to take on additional debt to keep pace with operational obligations they were required to meet as they worked to continue to grow production and reserves.
In recent years, investors began clamoring for enhanced returns, prompting companies to redirect some cash flow toward dividends and to reclaim open shares from markets, a tactic aimed at pushing values of remaining shares held by investors higher.
Some companies like Chesapeake and Laredo Petroleum have executed reverse stock splits to also boost share values.
Zac Reynolds, the chief investment officer at Full Sail Capital in Oklahoma City, observed that exploration and production companies across the nation have all suffered.
Reynolds said the average return on large-cap energy companies that are part of the S&P 500 was a negative 39% over the July 1, 2019, to June 30 time frame, adding, “most of our Oklahoma companies have done even worse.”
The economy’s energy sector, Reynolds noted, had been getting pressured by oversupply issues for years, even before the coronavirus pandemic and its hit on downstream energy demands arrived.
He said the industry remains victimized by its own success, describing recent domestic growth in the production of oil and natural gas attributable to horizontal drilling and hydraulic fracturing as a major factor contributing to that oversupply.
“I have often remarked how the best cure for high prices is high prices, because it incentivizes people to drill. As production climbs, prices go down,” Reynolds said.
“The same is true with low prices. As fewer people drill, supply drops and prices go up. Commodities have a way of working themselves out over time.”
Will investors return?
Despite bleak results in past years, Jake Dollarhide, the CEO of Longbow Asset Management in Tulsa, said he is still advising clients looking for future solid returns to put some of their dollars with energy companies.
“Jim Cramer, one of the world’s most widely-quoted investment advisers, came out in October and said that oil and gas companies are uninvestable,” Dollarhide said. “But what that tells me is that you should invest in oil and gas companies. And I am not being a rah-rah, home-team player here. It’s just ‘Investing 101.’ ”
Dollarhide predicts interest rates will rise, which in turn should prompt more investor interest in financial firms, and predicts the same trend will occur as oil prices increase over time.
“We aren’t going to all be driving Teslas 10 years from now just because we woke up on March 23 all using Zoom. We are going to be driving Ford and GM pickups and SUVs, and oil and gas is going to continue to be needed to fuel our vehicles, to heat our homes, to provide us with the plastics we use throughout our economy and to power those large manufacturing plants that turn out everything we use. Oil and gas still has a place in our country and has a place in our business world,” Dollarhide said.
Robert Dauffenbach, director of the Center for Economic and Management Research at the University of Oklahoma's Price College of Business, said he expects the energy industry will recover once the pandemic has run its course.
“The industry is presently engaged in significant merger and acquisitions activity with focus on efficiencies and free cash flow,” he said. “Natural gas prices have improved to the plus $3 range, and oil prices have clung to the $40 level in recent months. Suffice it to say that there clearly are reasons for hope.”