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US shale stocks go into reverse

Chesapeake, Callon and Oasis Petroleum have all announced reverse stock splits, highlighting the parlous financial health of the sector

Economic uncertainty is raising fears of a swathe of shale bankruptcies, following US independent Whiting Petroleum’s Chapter 11 filing at the start of April. Company share prices have fallen so low that Chesapeake Energy, Callon Petroleum and Oasis Petroleum have proposed reverse stock splits to try to prevent themselves from being delisted.

A reverse stock split is a way of inflating the price of a stock by reducing the number of shares in circulation, thereby boosting the value of each individual share. “Reverse stock splits in any industry, not just energy, are typically considered a bad sign by investors,” says Muhammed Ghulam, senior associate at US bank Raymond James. “Companies usually pursue them after their stock price has declined significantly, and in many cases, like some of the energy companies pursuing reverse splits today, there is a significant chance of bankruptcy in the company’s future.”

1 in 200 – Chesapeake’s reverse split

Poor performance may become a “self-fulfilling prophecy”, Ghulam adds, “as investors flee stocks that have undergone reverse splits and hedge funds short such stocks in the hopes of making a profit”.

Split decisions

Oklahoma-headquartered Chesapeake, which produced 477,000bl/d oe in Q4 2019 from assets in the Marcellus shale basin and elsewhere, announced its reverse split on 13 April. Its SEC filing declared it would issue one new share for every 200 in circulation.

The move followed a warning from the New York Stock Exchange (NYSE) that the company was in danger of being delisted if its stock remained below the $1/share minimum price. The manoeuvre boosted Chesapeake’s share price to roughly $15, but it is now back in a downward trend. Chesapeake has $302mn of debt maturing this year and a total debt load of nearly $9bn. It suspended dividend payments in mid-April.

Meanwhile Callon, which has assets in the Midland and Delaware basins in the Permian and produced 46,600bl/d oe in Q4 2019, has announced plans for a reverse split following its own warning from the NYSE, although the details have yet to be confirmed. The value of its stock tumbled to around $0.40/share in mid-April, having first sunk below $1 in early March. The company had $3.2bn in debt as of the end of 2019.

“Reverse stock splits in any industry … are typically considered a bad sign by investors” Ghulam, Raymond James

Oasis, which produced 87,400bl/d oe in the fourth quarter of last year from holdings in the Williston and Delaware basins, proposed its reverse-stock split in an SEC filing on 30 March. The Houston-based company said the ratio would be between 1-in-20 and 1-in-100, with a vote on the matter due to be held at its annual meeting on 28 April. Company shares had been trading below $0.50 on the Nasdaq since mid-March. Oasis’ total debt at the end of 2019 was $2.7bn but does not face significant debt maturity until 2022.

Although the reverse-stock splits will allow Chesapeake, Callon and Oasis to maintain their listings on the NYSE and Nasdaq for now, a change in the direction of travel looks difficult unless something significantly changes in the oil market.

Josh Silverstein, senior analyst at equity research firm Wolfe Research, tells Petroleum Economist he expects more companies in the US shale sector to follow Whiting’s restructuring example if oil remains at around $30/bl or lower in 6-9 months’ time. Even at $40/bl, he expects the financial risk to remain for these companies, saying “the longer we stay down here, the more likely it is you will see [such] companies file”.

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