What happened
Shares of oil and natural gas driller PDC Energy (PDCE) fell as much as 16% in the first 90 minutes of trading on Sept. 10. So far in 2020 the company's stock price has been cut roughly in half. The big issue is clearly the COVID-19 related demand disruption that has left energy markets moribund for months. Today's drop, however, was related to something very specific.
So what
The news that spooked investors today is that PDC Energy announced plans to issue an additional $150 million worth of debt. The proceeds of the sale, which will carry an interest rate of 5.75%, will be used to pay down a revolving credit facility. In other words, the exploration and production company is looking to turn temporary debt into permanent debt. Investors were not pleased with that development.
Image source: Getty Images.
The reason really goes back to the big-picture of the oil market, which is struggling to adjust to a massive supply/demand imbalance. In fact, the situation was so bad earlier in the year that oil prices actually fell below zero. That was a temporary event, and there were technical reasons for the price drop, but it highlights the depth of the problem drillers are facing today. It is very hard for energy companies to make a profit with oil prices as low as they are right now. PDC Energy has been working very hard to adjust, including cutting its capital spending plans by a huge 50% from its early year projections. Muddling through this period has also involved a significant increase in leverage, with long-term debt levels increasing by nearly two-thirds in the first half of the year. It's not a particularly reassuring sign that PDC Energy is now going back to the debt markets looking for even more cash.
Now what
Cash is king when times are tough, so PDC Energy is doing what it has to in an effort to ensure it gets through what is a very difficult period for energy stocks. And yet, with a debt-to-equity ratio of nearly 0.75 times before the just-announced debt sale (up from around 0.5 times at the start of the year), the energy company's balance sheet is looking at least a little stretched. Most investors considering investing in the energy space would probably be better off sticking with a larger, more financially stable name like Chevron right now given the inherent uncertainty in the oil space.
