In today’s tough price environment where most oil and gas juniors are losing money, a strong balance sheet is the key to survival, says Brian Bagnell. Access to liquidity will also help these companies hold on until prices rise again. Bagnell, a research analyst for Macquarie Capital Markets, tells The Energy Report he expects a gradual turnaround to begin late this year, and gives his tips on identifying companies that can weather the storm.
The Energy Report: Brian, is there a production cost for North American oil and gas producers at which most juniors can no longer afford to operate?
Brian Bagnell: When you’re losing money—and at these prices, most companies are—the balance sheet becomes the most important asset you have. We have a number of producers that have balance sheets that are looking stretched on the current strip, but there are also a number that are doing fine, either through a combination of hedging in 2016 or conservative capital budgets in 2015 and 2016, which has left them in relatively good shape looking forward into 2016.
We did a study last month looking at break-even costs for all of our North American producers. We looked at 57 covered companies between Canada and the U.S. When the 2016 strip was hovering around $41 per barrel ($41/bbl), we found that the vast majority of companies were able to cover production costs. However, once you consider maintenance capital, which is money that needs to be spent by the company to hold production at current levels, only 9 out of 57 had excess cash flow. Once we factored in dividends, that number dipped to just three companies.
TER: How do you identify a junior company with staying power in this price environment?
BB: Again, the focus should be on the balance sheet because if a company is …read more