Why Hedge Funds Are Calling It Quits on Energy Companies

(Continued from Prior Part)

Vaalco Energy’s (EGY) revenues declined to $18.2 million in 1Q15, from $28.1 million in 1Q14. Net loss attributable to the company was $39 million, down from a loss of $7.04 million in the prior year period. This translated to a diluted net loss per share of $0.67, down from a loss of $0.12 per share in 1Q14.

Vaalco’s CEO (chief executive officer) Steven Guidry mentioned in an interview with Oil & Gas 360 on April 8, 2015, that Vaalco has minimal debt on its balance sheet and more than $90 million in cash reserves as of the end of 2014. Guidry also added that the company doesn’t hedge its production. He also said the company holds on to the belief that its cash holdings, credit facility, and cash flows are sufficient to fund the firm’s drilling program this year.

Vaalco’s debt-to-equity (or DE) ratio is 0.1x. This is significantly lower than DE ratios of 1.4x for ConocoPhillips (COP), 0.4x for EOG Resources (EOG), and 1.0x for Anadarko Petroleum Corp. (APC). Having unhedged production could raise eyebrows among investors since it probably took a large toll on the company’s performance. Further crude price decreases can impact small cap stocks like Vaalco much more than companies that are better hedged. Vaalco is part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) with a weight of 1.2%.

Despite the weak environment for oil prices, there’s still a reasonable global demand for oil. The International Energy Agency projects global demand for oil to grow by 1.1 million barrels per day (or mb/d) to 93.6 mb/d for 2015. It’s estimated that crude reserves in the United States dropped by 2.8 million barrels in the week ended May 22, 2015.

Falling reserves amid growing demand could offer some support for oil prices during the last half of 2015. The question remains whether an uptick in demand will be able to accommodate currently oversupplied markets amid a fight for market share by OPEC ( Organization of the Petroleum Exporting Countries ).

Browse this series on Market Realist:

• Part 1 - Smithwood Advisers and Hancock Sell Stakes in Energy in 1Q15
• Part 2 - Rising Dollar and Oversupply in June Set Long-Term Trends in Oil
• Part 3 - Mixed Economic Results from China Add to Sluggishness in Oil