Oil producers and oil services still not safe enough

George Kessarios
Chief Economist & Fund Manager

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Analyst Insights, Monday, 31st of August, 2020

As you can see from the first chart, the Baker Hughes Crude oil rigs count finally had on the uptick. Rigs pumping oil increased from 172 to 183 sequentially

However, if we look at the second chart, we still have a very long way to go in order to reach over 800 rigs in operation, as was the case back in 2019.

And with oil still under $50 a barrel, the question remains if many US oil producers and service providers will make it before they are forced to restructure. The answer is difficult to answer. For example, recently service provider FTS International (ticker: FTSI) voluntarily opted for Chapter 11 protection from creditors, even if its balance sheet had plenty of liquidity (or so we thought). Creditors will take over 90% of the company, leaving current common shareholders with about a 10% stake.

It seems that the reason for FTS’s downfall is the low prices. As long as they continue to be low, many companies might need restructuring, even if on the face of it their balance sheet seems ok.

The bottom line is, continue to avoid the oil and gas sector, especially the juniors, with the exception if you are absolutely confident that the balance sheet is strong enough, to continue to weather the low oil price storm.

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