This is from a subscription service so I'll share some excerpts - penned by Guggenheim Securities . Italics will be quoted sections. Non-italics is my view and perhaps how it relates to SSN.
Effectively leads with the statement "We don’t believe the U.S. upstream oil sector can return to what it was."
Opines that "The sector should be leaner in all aspects -- capital structure, land and operations. The steady-state future could look much different than the debt-fueled leasing and drilling frenzy that has characterized the industry."
Forecasting that a "leaner capital structure requires that delevering will continue. We believe equity raises are the most sensible strategy to reduce leverage long term. In the near term, the market will likely focus on cash-flow neutrality and bank debt, but we believe the attention will soon shift to debt maturities over the next three to five years."
OK - so SSN doesn't have a leveraged balance sheet like say Halcon (HK) for example but it is leverage with LT Debt greater than shareholder equity (as reported in 2015 10K). With SSN's reduced CapEx budget they clearly are not outspending their cashflow so tick the cashflow positive box (ex DD&A). However as I posted a few weeks back the Bsnk Debt becomes "current" next year (as show in SSN 10K) and the attention shifts to what happens at maturity (guessing it becomes term debt - 2 years maybe??)
A few measures to delever undertaken thus far by E&P companies include "Asset sales, hedge monetizations, second liens and private equity joint ventures are stop-gap measures, in our view. Equity raises, as early as the fourth quarter or early 2016, are the most direct path to delevering a sector that no longer values net present value over returns on capital employed."
SSN has done asset sales recently, has monetized hedges recently and we'll see what is in store for Paradox. They have yet to tap 2nd lien loan to alleviate any BB concerns (if any). Now Guggenheim continues with "The delevering process accelerates in the fourth quarter with bank borrowing base revisions. Borrowing bases will be under pressure because of: 1) lower prices (latest Macquarie Tristone survey indicates an oil price deck below $65 [per barrel] through 2019); 2) a “hedge cliff” as most companies are unhedged in 2016; 3) declining proved developed producing reserves (PDPs) as the capital to maintain production and convert proven undeveloped reserves is squeezed by lower prices;"
I think if you read the 2015 thoroughly you may share some of those concerns for SSN. The price deck becomes key as does the Strip price. You can already see the minimal 2016 hedging and very clearly see the declining PDP reserves being reported (although more to do with poor results from exploration capital invested as they did convert their PUDs).
Conclusion is "The companies most at risk of borrowing base redeterminations are those with expiring hedges, decaying PDPs, and high-cost operations."
Continuing their review they note "We wonder, however, how the debt can be refinanced on equivalent terms in an era of shrinking reserves and rising interest rates. Interest expense could consume a larger cut of earnings before interest, taxes, depreciation and amortization (Ebitda) in 2016 even as efficiencies emerge in operating and capital costs. For some companies, interest expense will constitute 25%-30% of next year’s Ebitda. The effects could be circular. Less capital remains for reserve growth, which reduces debt capacity or raises funding costs."
For SSN, I don't see Interest Expense getting to that 25%-30% of EBITDA. However the point made on how debt can be refinanced is salient as is the comment re capital for Reserves growth.
Their overall conclusion:
"We believe companies that can survive the trauma of delevering more or less intact are those with low-cost resource potential, PDP growth potential, low levels of debt (particularly bank debt), and low cash burn rates."
So how does SSN fit into that description.....???
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