Energy stocks had a rough year in 2020. Oil prices went negative for a brief moment and demand is down because people are traveling less during the pandemic.
To make matters worse, the transition from fossil fuels to renewable energy continues in the electricity sector, leaving coal in the dust. As the energy industry has dealt with a pandemic and macro trends, there are a few companies that may end up going bankrupt relatively soon. Peabody Energy (NYSE:BTU), Transocean (NYSE:RIG), and Occidental Petroleum (NYSE:OXY) could be some of the biggest names to fall.
It hasn’t been long since Peabody Energy was in bankruptcy court, so the company is familiar with the process. And it may be headed back into bankruptcy unless we see some kind of turnaround in coal demand, which seems unlikely at this point.
You can see below that Peabody’s revenue has dropped like a rock, losses are mounting, and free cash flow is negative. No matter how you look at it, the company’s operations are in shambles.
The worst news is that coal consumption from U.S. power plants continues on a long decline. And there’s no end in sight, with the number of operational plants in decline and renewable energy now costing less for new power plants.
Peabody Energy does have some bright spots, including metallurgical coal and exports, but they’re not nearly enough to make up for the loss in U.S. thermal coal demand.
Bottom line, there isn’t a bright future for coal or Peabody Energy, and that’s why the company may eventually end up in bankruptcy — again.
Let’s face it, the thesis that ultra-deepwater offshore drilling would be the future of the oil industry has proven to be completely false. And companies like Transocean, which committed billions of dollars to the effort, are paying the price.
Revenue has stagnated as management has just tried to keep rigs busy, and losses have mounted over the last three years with no end in sight.
The trends going forward don’t look good either. Oil prices are remaining stubbornly low and offshore drilling rig activity has plummeted in 2020. And Transocean has $8.3 billion of debt hanging over the company.
To be fair, Transocean does have $1.83 billion of cash on the balance sheet, but it also has a lot of obligations this year. $652 million in debt due in 2021 and a total of $1.1 billion will be needed to pay back debt and pay interest charges. On top of that, the company has $1.3 billion in newbuild obligations due in 2021. That cash will dry up quickly if the offshore drilling markets don’t improve quickly.
The oil markets are in trouble amid the transition to electric vehicles, and that will continue to put pressure on oil prices. That ends up hurting companies like Transocean, which may be in bankruptcy court before an oil recovery ever comes.
This is a bit of a longer shot, but I think Occidental Petroleum could end up in bankruptcy in 2021. After acquiring Anadarko Petroleum in 2019, the company has spent 2020 in survival mode. In the third quarter alone it sold over $2 billion in assets to shore up the balance sheet and reported a $3.8 billion loss, or $4.07 per share.
The problem is that Occidental has $38.5 billion of debt on the balance sheet after the Anadarko Petroleum deal, and it has just $5 billion in cash and investments right now. Without positive earnings from operations, the business could be in real trouble.
Like any energy company, Occidental’s fortunes will rise and fall on commodity prices and demand, but in 2021 I don’t see oil prices rebounding. And demand could wane if the economic recovery is slower than expected. That’ll put more pressure on the company, which can only reach out to debt markets for so long before running out of alternatives to fund its money-losing business.
Energy stocks aren’t as safe as they used to be
Energy stocks used to be seen as a safe place to park your money or earn big dividends. But the industry has changed as renewable energy has become more viable and more people are driving electric cars. It doesn’t look like there will be a recovery for the industry overall, and that could force companies like Peabody Energy, Transocean, and Occidental Petroleum into bankruptcy.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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