Its no secret to anyone that the oil and gas sector has been incredibly hard hit in 2015. Bankruptcies in the space are skyrocketing, and drilling has slowed to a snails pace. Driven by OPEC’s game of chicken, oil prices have plummeted to lows not seen since 2008, the last crash. Unlike the many Microcap Exploration & Production (E&P) companies in 2008, microcap E&P’s today have become over extended due to cheap money provided by the policies of the Federal Reserve and the promise of hitting oil that could be sold at $100 per barrel. What we are seeing today is the bubble being burst by low oil prices combined with way too much debt, leading to a record number of bankruptcies.
Leverage is the double-edged sword of the Microcap E&P. In good times, it’s the cheapest source of capital. In bad times, it’s the capital that plays your hand for you. Because so many operators are highly leveraged, they have no choice but to keep producing barrels today at low price levels in order to stave off BK. Inevitably, if the price does not turnaround quick enough, there is no capital to be borrowed for capex, therefore the decline in barrels accelerates and thus the cash flow decelerates. Those that can’t stay on the treadmill long enough to weather the storm, will face the same fate as so many before them, the chapter 11 line.
The banking industry too is not immune. Soon the bloodbath occurring in highly leveraged Microcap E&P’s will trickle down to the banks. They too will have to write down loans due to lack of debt service and more importantly, lack of reserve value due to lower prices. Write-downs for public E&P’s are already in the billions and will continue for the next two quarters at least.
So what is in store for 2016? First, a lot of praying for an oil price recovery into the mid 50’s or higher by 3rd quarter of 2016. Those Microcap E&P’s who have withstood the storm will be in excellent shape to take advantage of the rebounding commodity while keeping the cost of drilling and the cost of operating lower. Second, you should see continued de-leveraging. E&P’s with clean balance sheets will end up being the winners in the space. Lastly, don’t be surprised if the M&A activity does pick up in 2016 as strong players look to pick up undercapitalized players or leveraged players who are sitting on excellent assets. Look for the Permian basin to continue to be a hotbed for activity as assets are being high graded and the Permian seems to stand above all others.
John Brda, CEO
Torchlight Energy Resources, Inc. (ticker: TRCH)
Torchlight Energy Resources, Inc. (TRCH), based in Plano, Texas, is a high growth oil and gas Exploration and Production (E&P) company with a primary focus on acquisition and development of highly profitable domestic oil fields. The Company currently holds interests in Texas, Kansas and Oklahoma where their targets are established plays such as the Wolf Penn, Eagle Ford Shale, Mississippi Limestone and Hunton Limestone trends. For additional information on the Company, please visit
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