Problems at companies like Chesapeake Energy Corporation (NYSE:CHK) will no longer be tolerated. For years the company generated negative free cash flows, aggressively using debt to fund new land purchases and dividends.
This policy resulted in massive losses when natural gas prices plunged in 2012. Chesapeake Energy Corporation (NYSE:CHK) lost $770 million and the share price collapsed 60%. As a result the company was force to slash its drilling program and sell off assets to shore up the balance sheet.
Looking around the oil patch, there are other potential disasters brewing.
The same thing that happened with Chesapeake Energy Corporation (NYSE:CHK), for instance, could easily happen to Oasis Petroleum Inc. (NYSE:OAS)
Last year, Oasis grew production in the Williston Basin 70% year-over-year. Management has grown reserves at a 120% compounded annual growth rate since 2009.
While those growth numbers are impressive, Oasis has funded most of that growth through $1.2 billion in external borrowing.
If prices fall, Oasis will be forced to shed assets and pursue a more sustainable growth strategy. As Fool contributor Matt DiLallo recently pointed out, a company can only outspend its cash flow for so long before it bumps up against its limits.
Foolish bottom line
The oil business of the 21st century will look a lot different from the previous. The industry will favor the big over the bold and the capitalized over the leveraged. Re-position your portfolio accordingly.
The article How This Trend Is Completely Reshaping the Energy Business originally appeared on Fool.com and is written by Robert Baillieul.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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