Debt: It's Not Just a Government Problem

The saying "cash is king" holds true for companies and individuals alike. Sometimes a company flirts with insolvency before rebounding and making money for its investors. Sometimes it goes bankrupt. Below are three energy companies looking at a significant funding shortfall in the next two or three years. Should investors sell before these stock's crash?

Turning around in America's heartland
In a gutsy move, SandRidge Energy sold known producing assets in the Permian Basin to focus on producing oil in its unproven Mississippian Lime play. Along the way, the company invested heavily in wastewater disposal and electricity infrastructure. In fiscal year 2013, SandRidge reported earnings surprises, the most-recent quarter showing a profit of $0.08 a share when most analysts expected $0.03 a share.

During its conference call, the issue of funding operations came up. SandRidge CEO James Bennett addressed the matter head-on, pointing out the company looks funded through 2015. Bennett offered a variety of options to fund operations going into 2016. These include selling non-core acreage, trusts that SandRidge owns, or infrastructure assets. Joint ventures remain a possibility.

What are the prospects? SandRidge recently sold some of its trust holdings for $30 million to fund operations. The company needs that cash since it budgeted $1.4 billion in capital expenditures for this year but reported only $358 million in cash flow for the first six months of 2013. It managed to decrease its well expenses and lease operating expenses from the previous year. The trends are positive, but it's still a race to see if SandRidge can produce enough oil to cover expenses before its cash reserves run dry.

Proven production and potential plays
Like many larger companies, Halcon Resources both operates known producing oil assets and prospects for more elsewhere. Its producing assets are in the Bakken of North Dakota and the El Halcon of East Texas. The Bakken seems to be the steady producer, cranking out over 15,600 boe a day. The El Halcon is growing production with a projected year end production of about 6000 boe a month. The prospecting plays are in the Utica and Woodbine Texas plays. The company hopes to have enough data in hand by the end of the year to decide if these plays are worth pursuing.

The growing production is paying off. Halcon reported quarterly earnings grew by 800% and quarterly earnings grew by over 300% year over year. Further, the company recently sold non-core assets for about $302 million to help pay for operations. Lastly, the company reported significant insider buying of late.

The big concern is debt. As of the end of the second quarter 2013, Halcon had $2.7 billion in debt. Its cash and equivalents was $3 million, EBITDA was $126 million and operating cash flow was $350 million. I calculate debt to EBITDA to be 7.75 and debt to operating cash flow at 7.75. This compares to SandRidge's ratios of 3.06 and 2.93, respectively. The earliest any of this debt comes due is 2017, and half of it comes due in 2021. During its latest earnings conference call, CEO Floyd Wilson was pointedly asked about Halcon's funding mechanism for 2013 and into 2014. Floyd's response was to point out the increased production, funds from divestitures, and a growing borrowing base as reserves increase.

Lots of potential but no oil yet
Cobalt International Energy looks for oil where exploration hasn't been done in the Gulf of Mexico, Gabon, and Angola. Specifically, the company searches for oil in so-called pre-salt formations where significant oil reserves are believed to lie. To date the company has yet to produce any oil or revenue. It's risky business. In mid-August the company announced it failed to find commercial oil in one of its Gulf exploratory wells, and the stock dropped from $29 a share to less than $25 a share in less than a week.

So how much oil could Cobalt's portfolio contain? The company's recent investor presentation claims its Gulf of Mexico and West African holdings could collectively hold as much as 1 billion barrels of oil equivalent with low entry costs. Unfortunately, first oil from any of its deep water plays isn't expected until mid-2016. More oil production should arrive the following year.

So how will the company fare from now until 2016? A company spokesman in a call stated Cobalt has $2.3 billion in cash and liquidity, and projects cash expenditures of $750 to $900 million for this upcoming year. All told, Cobalt believes it has the funds to carry it "well into 2015." So what's going to happen in late 2015 and mid-2016? The spokesman responded, "It's a question we hear a lot." I'm sure they do. The spokesman would not offer guidance beyond 2013. However, she did point out the company has "lots of options" regarding funding, including joint ventures and debt.

Foolish final thoughts
Of the three, SandRidge looks best positioned to fund itself beyond the next two years. Oil production is increasing, it has over $1 billion in cash, and it owns salable assets. Halcon also has both producing assets and assets that could be sold to cover operating expenses. Its current cash position is considerably thinner than SandRidge's. Cobalt has cash, but no oil production. Crunch time for Cobalt will come late in 2015 or early 2016. I'd be careful until the company offers specific plans for dealing with its funding gap.

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The article Debt: It's Not Just a Government Problem originally appeared on Fool.com.

Robert Zimmerman owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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