Hi EKS,
I've been only buying O&Gs with DE < 25%. In general I almost never invest at DE > 50%, and in this case I don't see much reason for Brent to sit far above 60 until a great many firms have bankrupted. There is a natural homeostasis here - if you pick the firms with lowest debt, highest cash balance and lowest breakeven price, they're highly likely to survive and thrive since the bankruptcy of competitors will provide M&A opportunities plus eliminate the excess supply. The process could take years but the market will anticipate. Both TGA and BNKJF are examples. I've been very impressed with the management prudence of Canadian IOCs c/w their American counterparts. And they're less picked over too.
Wrt the debt/ assets ratio, seems troublesome. Not just the NPV of the assets and the difficulty inherent in P3 valuation, but if you think about it the value of reserves below cost is much less than spot price would indicate. Because if it costs more to extract the product than you can sell it for, the economic value is future only, and hence highly uncertain. My metrics focus on cash, working capital, debt, and marginal production cost.
Admittedly I am no expert on distressed debt, but if I went there I'd probably use similar requirements. I believe TGA still has some convertibles at decent yield.
Good luck,
Graham |
