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How To Find A “Bargain” In A Distressed Energy Sector

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If the history of the so-called “Great Recession” of 2008-9 is to be believed, while the current carnage in the energy space will negatively impact a lot of people, both investors and those in the industry, it will create some tremendous opportunities for those with the ability to take big risks. At some point, this too shall pass and when it does, it will become clear that some stocks were massively oversold on the way down.

That doesn’t mean, however, that investors should be rushing in to buy depressed energy stocks willy-nilly. The collapse in oil prices will have some real, long-term consequences that could be dire for some companies.

The problem is not just that crude prices are being hit at the same time as the coronavirus shutdown kills demand. It is also that a lot of energy companies came into this with massive debt loads. That presents an obvious, immediate short-term problem of servicing the debt as revenues dry up, but there is another, bigger, long-term problem that for many could prove to be an existential threat.

The security for those loans is usually oil and gas reserves, and those reserves are worth a lot less now than they were just a few months ago. In the case of oil, the value of the loan collateral has dropped by over sixty percent in three months. Natural gas holdings have halved in value since November of last year.

In theory, that doesn’t really matter that much to the borrowers until the loans come due and need to be refinanced…





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