The negative sentiment on oil stocks is likely to carry on for months. There will be more losers than winners as capital flees from a sector that is showing minimal signs of rebounding. Canadian oil companies are no longer attractive as they were in previous years. Some might even be insolvent before this year is over.
The shares of Birchcliff Energy (TSX:BIR) and Crescent Point Energy (TSX:CPG)(NYSE:CPG) are trading below $2. Their year-to-date losses are 42.8% and 68.5%, respectively. It might come to the point that the prices of these oil stocks will drop to zero in 2020.
Investors should steer clear of Birchcliff. The tumble of this $380.29-million intermediate oil and natural gas company is much worse than its recent crash. The twin impact of plunging oil prices and the pandemic is so debilitating. Its market value is about 84% down from the level some five years ago.
If you think there is a slim chance of regaining lost ground in 2020, forget it. Birchcliff’s total outstanding debt is around $677 million. How can this Calgary-based company rise from the pits when its market cap is 56% of liabilities?
Furthermore, Birchcliff is cash-strapped. Dividend investors relying on the generous payouts over the past three years better take heed. The company no longer has the staying power to sustain dividends.
The dividend history of Birchcliff Energy is shorter relative to established dividend-payers in the sector. It has yet to prove its resilience during downturns. But with the oil problem, time is running out.
Crescent’s liquidity position is far better than Birchcliff’s. In the first quarter of 2020, this $957.42-million producer of medium and light crude oil shifted to a modified working environment.
There was net debt reduction as well as $50 million savings in permanent operating expenses. But with the rapidly changing environment, management saw it fit to reduce the capital budget by $75 million. Crescent’s main focus now is to protect the balance sheet and financial liquidity.
In addition to reducing capital spending by 35%, the company slashed its dividends too. The move should be the last straw to dividend investors. The company already made multiple dividend cuts in five years. With the recent decrease, the next quarterly cash payment will amount to a penny per share per year.
The bigger problem is profitability. How will Crescent generate revenue if oil continues to trade for free or at rock-bottom prices? An oil price bounce is not likely to happen anytime soon.
Not giving up
Canada’s Prime Minister, Justin Trudeau, is not giving up on the oil and gas sector. He doesn’t agree with the assessment of many that oil is dead. The PM sees an opportunity for the oil sector to develop and implement innovations that will lessen greenhouse gas emissions.
The country’s economy will recover and perhaps see a healthy oil sector soon. Unfortunately, Birchcliff and Crescent Point do not have the luxury of time. Both oil companies are on the ropes, and insolvency is a strong possibility.