More Oil Producers Face Delisting
A bunch of cash-strapped, over-leveraged oil exploration and production (E&P) companies have been warned by the New York Stock Exchange (NYSE) or Nasdaq that they face delisting for not keeping their stock price above $1.00.
While a brief rally has helped U.S. oil price rebound from its 12-year low of $26.21 reached in Feb, at slightly under $40 a barrel they still remain around 35% down from 2015 highs and far below the breakeven price for many energy companies.
Oil Slump Has Soured Their Economic Indicators
With crude facing the heat on several fronts - mounting worries about China's demand, absence of major production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy - the commodity's price has dropped sharply over the past 18 months. From about $105 per barrel in July 2014 to around $40 now - sinking in between to a decade-low - the plummeting value of oil represents a decline of more than 60% over the period.
As oil sales floundered, producers got fewer revenues. To survive the period of weak profits, they took more debt. Some of them now face an existential crisis and for others - the time bomb is ticking.
While all crude-focused stocks stand to lose from falling commodity prices, companies in the E&P sector are the worst placed, as they are able to extract less value for their products. Consequently, with oil prices recently collapsing to their lowest levels in years, upstream firms have seen their revenues, earnings and cash flows hit hard. This, in turn, has unnerved investors and sent shares skidding to penny-stock territory.
Per NYSE rules, non-compliance occurs if a company's average closing share price over a 30-day period is less than $1.00. The company then enters a red zone that could result in the suspension of trading and delisting after 6 months. However, it can avoid delisting by getting its stock price above $1 within the stipulated period of 6 months.
How Companies Can Avert Delisting
The best-case scenario is to hope for a revival in business that will prompt the market to recognize the company's value and cause the share price to rise to at least $1.00.
Secondly, the company could go for a reverse stock split and 'force' the stock into compliance. For example, a 1-for-10 reverse split will reduce the company's outstanding share count by 90%, while causing a tenfold increase in price.
Another (and the least likely) strategy might be to use its scarce cash resources and credit facility to buy back shares and increase the stock's worth.
The Non-Compliant Players
It shouldn't be a surprise that with E&P companies' share prices plummeting along with oil prices, around half a dozen or so producers are in danger of being delisted by the NYSE and more remain at risk. Some of the companies that have been warned of potential delisting include Ultra Petroleum Corp. UPL , Warren Resources Inc. WRES , PetroQuest Energy Inc. PQ , Rex Energy Corp. REXX and Energy XXI Ltd. EXXI .
Is the Market Too Harsh on These Stocks?
The uncertainty of oil prices means that the future direction of the commodity's movement is anybody's guess. However, fundamentals suggest that the odds are firmly stacked against a sustained rally. Therefore, while it's possible these stocks stage a turnaround from their embarrassingly low share prices and avoid the ignominy of delisting, the industry outlook appears to be bleak for this to happen.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.