7 indebted oil stocks made for energy risk-takers

The crash in oil prices stresses energy company balance sheets. Here are 7 big oil companies with high bankruptcy risk based on the Altman Z-score.

As oil companies prepare for what's expected to be a challenging earnings season, a more dire prospect is on the horizon: Some companies weakened by the oil price crash could go broke.

Banks are getting tighter with energy-sector lending , and a short-term debt default can mean curtains. But the worst can also be headed off by an acquisition or relief-rally trade in energy stocks if the price of oil continues its recent rebound. That means it's not just risk but potential reward that's a reason to keep an eye on volatile energy companies.

To figure out which big oil stocks screen as being a default risk, we used the Altman Z-Scores Plus website, founded by a former student of the Z-Score creator, New York University finance professor Edward Altman. Altman is known for his corporate distress prediction models. An Altman Z-Score of below 1.81 is considered a red flag.

Working from a list of 360 energy companies with a market cap of $5 billion or more, the following seven are the oil and gas producers (a nat gas price slump hasn't helped, either) most at risk of default within five years. The list excludes those in pending M&A deals. Their Altman-Z scores range from 1.28 to 0.89. We've listed them in countdown mode to the No. 1 at-risk oil and gas producer.

It's worth noting that many investors are betting these companies will ride out the storm, and bond ratings on many of these companies are not as bad as the Altman-Z score would suggest, even though many have been on the receiving end of recent negative revisions.

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(Note: none of the companies below have reported earnings yet for the first quarter 2015-earning dates are listed below. Altman-Z scores are based on the last reported quarter, the calendar fourth quarter 2014).

Shares of this Oklahoma City oil and natural gas producer were among the worst S&P 500 stocks in the first quarter, according to FactSet. Low oil and-even more so for Chesapeake Energy (CHK)-natural gas prices are the key. Asset sales and spending cuts have strengthened the company's balance sheet, and the company claims cuts in capital spending will make it free-cash-flow break-even by the end of this year.

The company's bond rating, while below investment grade, was raised by Moody's Investor Service after a big asset sale last October from stable to positive. But early this year, S&P did the opposite, reducing its rating from positive to stable, writing, "The outlook revision reflects our expectation that credit measures will weaken due to our reduced oil and natural gas price assumptions, and that the company will not meet our upgrade trigger of sustainable debt/EBITDA below 2x within the next 24 months."

And keep in mind Chesapeake's distress level has decreased significantly since 2012, when its Altman-Z Score was as low as 0.38 and it was dealing with the repercussions of a financial crisis involving its then-CEO Aubrey McClendon, a balance sheet risk taker.

Chesapeake first quarter 2015 earnings: May 6

  • Altman-Z Score: 1.28

  • One-year stock performance: -45 percent

  • One-month stock performance: 12 percent

  • S&P rating: BB+/stable outlook (revised down from positive outlook in January)

Not as well known as some of the other producers due to its Canadian home base, Crescent Point Energy (Toronto Stock Exchange: CPG-CA) cut capital spending by a third this year but is standing tough on its dividend, now at a 9.2 percent yield after shares dropped by more than half from 2014's peak before rallying when it affirmed its fourth-quarter dividend. But the dividend cost more than $834 million last year, and Crescent Point's free cash flow was nearly $500 million last year. The company says more than half of its 2015 production (56 percent) is hedged to assure an average price of $89 Canadian per barrel and 33 percent of its oil production for 2016 hedged at an average price of $84.

Debt-to-cash-flow stood at 1.3 times at the beginning of 2015, according to the company. It also increased its syndicated credit facility by 40 percent, or $1 billion, to $3.6 billion and had only spent 35 percent of that credit line when the year began, which it said provided significant financial flexibility.

Crescent Point Energy first quarter 2015 earnings: May 7

  • Altman-Z Score: 1.19

  • One-year stock performance: -27 percent

  • One-month stock performance: 12.9 percent

  • Bond rating: N/A (not covered by S&P)

Damn the torpedoes! This Texas-based oil-and-gas producer was snapping up drilling locations as recently as late 2014 (including a $5 billion deal with Chesapeake Energy). It bought more than 5,000 drilling locations in the fourth quarter, ending the year with 54 percent more natural gas reserves than a year earlier, and the company's still planning to boost production this year.

Then, in March, Southwestern Energy (SWN) announced plans to sell $700 million in assets. The company's $7 billion in debt, two-thirds of it due in the short term, is of concern to investors. But CEO Steven Mueller contended, "Our talk has not changed. Our track record for the past several years ... provide[s] conclusive evidence that we can excel in volatile environments."

Southwestern Energy first quarter 2015 earnings: April 23

  • Altman-Z Score: 1.16

  • One-year stock performance: -45 percent

  • One-month stock performance: 19 percent

  • S&P rating: BBB-/stable outlook (downgraded from BBB in January)

Fourth-quarter earnings per share were half of what analysts expected, but oil bull T. Boone Pickens has added to his position in Houston-based Anadarko Petroleum (APC), which gets the largest share of its revenue from oil-and-gas exploration. The credit outlook isn't one-sided: Bond-rating service GimmeCredit included Anadarko on a March 20 list of companies it believes pose little default risk. And there's another good reason this stock is rebounding: Merrill Lynch on April 2 called Anadarko a takeover candidate.

Anadarko first quarter 2015 earnings: May 4

  • Altman-Z Score: 1.05

  • One-year stock performance: -5 percent

  • One-month stock performance: 14 percent

  • S&P rating: BBB/stable outlook

Brazil's "national champion" oil company found itself in the news last week when Royal Dutch Shell bid $70 billion for U.K.-based BG Group, whose biggest asset is part of a huge offshore oil field near Brazil that's controlled by Petrobras (Sao Paulo Stock Exchange: PETR'-BR). But any good news from the Lula field will compete for investors' attention with a massive corruption scandal that has crushed the stock in the past year.

The company has been working to finalize a 2014 earnings report, which is expected out today . The report will try to sort out the distortions caused by past exaggerations of the value of refineries and other assets.

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Shares have risen near-60 percent in the last month as the company has moved closer to the expected revised earnings issuance, and some investors bet Petrobras can actually move beyond the scandals and cope with lower oil prices.

  • Altman-Z Score: 1.03

  • One-year stock performance: -37 percent

  • One-month stock performance: 56 percent

  • S&P rating: BBB-/negative outlook (revised on March 24)

Like Anadarko, Houston-based Apache (APA) is on a list of likely takeover candidates compiled by Wolfe Research. It's in the process of closing $3.7 billion in asset sales to raise cash, selling two liquefied natural gas projects. It lost $4.8 billion in the fourth quarter and is slashing its rig count to 17 from 91 in response to falling prices.

In January, S&P placed its A- rating on Apache on watch with negative implications. "Lower oil prices will hurt Apache's cash flow generation and ... leverage is likely to exceed the level we view as appropriate for the current rating, even considering recent asset sales and North American capital spending reductions," the rating agency said.

Apache first quarter 2015 earnings: May 7

  • Altman-Z Score: 0.95

  • One year stock performance: -17 percent

  • One-month stock performance: 18 percent

  • S&P rating: BBB+/stable (downgraded from A- on April 15)

The Denver-based oil-and-gas producer lost $353.7 million in the fourth quarter and also made the Wolfe Research list of likely takeover candidates-but the company said late last month that it will only pursue non-core asset sales rather than a "significant" transaction.

Whiting Petroleum (WLL) became the largest producer in North Dakota's Williston Basin when it bought Kodiak Oil & Gas last December, assuming $2.2 billion of Kodiak's debt but gaining enough wells to help boost proved reserves 78 percent last year. It also sold $1 billion of common stock and $2 billion in convertible notes last month, which caused its stock to slump as it coincided with the management decision to not find a buyer.

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At the same time, it's cutting capital spending in half, to $2 billion this year. The strategy amounts to a bet that oil prices will rebound by the time the new debt is due for repayment in 2019 and 2020.

In January, S&P lowered its outlook on the company's bonds to negative from stable (BB+ rating). S&P said leverage could exceed levels it views as appropriate for the rating over the next two years and debt/EBITDA would run between 3.5x and 4x, though that could change based on revisions in capital spending or improved operating margins.

Whiting first quarter 2015 earnings: April 29

  • Altman-Z Score: 0.89

  • One-year stock performance: -51 percent

  • One-month stock performance: 4 percent

  • S&P rating: BB+/stable outlook (revised down from positive in January)

-By Tim Mullaney, special to CNBC.com

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