Host of one of the most popular financial shows says big companies might take assets off the books of struggling smaller producers.
[This article originally appeared on Sprott's Thoughts and is republished here with permission.]
Weak revenues in the shale sector could put debt-laden companies at risk; a lot of these companies still own assets, but their cash flows have dropped off. They may begin to sell off these assets in order to cover their debts.
Who’s going to buy those assets? It could be companies with stronger balance sheets—and those that want to get into the North American shale sector.
Frank Curzio has accumulated a broad following to his regular podcast Wall Street Unplugged. He’s been rated “most listened-to” on the iTunes store for a financial show.
In his 10 years spent doing interviews and regular shows, he’s also been able to speak with many Wall Street analysts and forecasters.
I spoke with Frank recently about the oil plunge.
Frank believes this is an opportunity for some of the majors to gain a significant foothold in the shale industry. So far, oil giants like Exxon or Chevron have only small exposures to shale oil relative to their sizes. But they have the cash to enter the Bakken, the Permian Basin or the Eagle Ford and purchase properties, especially if we see fire-sale prices.
Major oil companies tend to endure oil price declines better, because their revenues are less sensitive to the price of oil. Their ‘downstream’ divisions include marketing, distribution, and refining, which can actually benefit when prices drop.
These big companies might take assets off the books of some of the smaller producers who get hurt by cheap oil.
Many smaller oil companies are still protected against low oil prices because they’ve “hedged” their production for 2015. While the oil price is around $50-$60, many are still making $70-$100 per barrel.
But as Frank pointed out, it’s dangerous to put your faith in these hedges. Typically, they are 12-month contracts, which means they will end in 2015.
Frank warns that some companies are being presented as “cheap” by analysts without regard for the inherent expiration date on the hedges that are buoying their cash flows. “When those hedges come off, they’re going to be selling their oil for a lot less,” he said.
Frank explained that a lot of these experts are on media outlets because they’re making a bold call – that oil and oil stocks will go up or down.