All eyes are on the oil price and drilling rig count right now…
Investors and industry analysts are watching these numbers for signs of a recovery or further decline in the sector.
But there’s another number investors should be focused on… And it points to more pain ahead for some oil and gas companies…
Let me explain…[ad#Google Adsense 336×280-IA]Today, there are about 4,000 uncompleted wells in shale areas in the U.S. – like the Permian Basin and Eagle Ford shales in Texas and the Bakken Shale in North Dakota – according to the Energy Information Administration.
This is a massive number. It’s equal to about 10% of all the wells completed in 2014.
Uncompleted wells have been drilled but haven’t been fracked or hooked up to pipelines.
In short, they’re wells that are drilled but aren’t producing oil.
I call them “zombie wells.” They’re essentially dead wells that will spring to life down the road when oil prices increase.
You see, big oil producers – like IHS (IHS), ConocoPhillips (COP), Pioneer Natural Resources (PXD), EOG Resources (EOG), and BHP Billiton (BBL)– can afford to drill now and wait for their returns. As soon as oil prices increase, they’ll be able to complete these wells quickly and capitalize.
So why should you be worried about the number of zombie wells today?
It means there’s a huge buildup of oil waiting to hit an already oversupplied market. When prices get high enough, this oil will flood pipes and refineries… which could cause prices to fall again.
And no one knows when these producers will tap their zombie wells.
This leaves smaller U.S. oil and gas companies with a big problem.
Many of these companies took on lots of debt to compete for acreage in the best shale areas against bigger producers. Now, many are struggling with low oil prices.
Take junior explorer Magnum Hunter Resources (MHR), for example. The $315 million company holds nearly $950 million in debt. Its quarterly gross profit is down from nearly $68 million a year ago to just more than $16 million in the first quarter of 2015. And its share price is down nearly 80% in the past year.
To stay afloat, the company plans to sell all or part of its pipeline that moves gas from the Marcellus Shale in Pennsylvania.
This will help in the short term… but to stay viable, the company needs higher oil prices for the foreseeable future.
Magnum Hunter isn’t alone. It’s just one of the many companies out there struggling with debt and declining profits – SM Energy (SM), Comstock Resources (CRK), and Whiting Petroleum (WLL), to name a few. And zombie wells are going to make life a lot harder for them.
In short, I’d avoid investing in these types of companies right now. There’s likely more downside ahead.
Source: Growth Stock Wire