The weakest link

If anyone asks you what is the worst sector at the moment, I'm pretty sure most people would think about oil industry. Indeed crude oil has got haircut over 50% in the past year and it dose not look like the pain is over. The blood will continue to flow in the streets for a while. In this kind of situation, it is fairly hard to trade. Yes, from time to time you can pinpoint to certain oversold condition for a quick trade for rebound but this requires really good technical skills and courage. But traders can also think about short to make money. What to short? Well, obviously you want to short those weakest link that has a high likelihood to fall. What companies are qualified for that? Think about it, if a company is under a high burden of debt with insufficient cash flow and they cannot even make money when oil is over $90, what will be their destine when oil is at low $40 and may go down further? Bankruptcy will be their fate! Oil will only bottom when you see more and more oil companies go belly up. See what happens to PVA (Penn Virginia), a once rather promising oil exploration and service company paying good dividends. Unfortunately during the booming time, PVA expanded too much with too much debt in the book and now it is on the verge of bankruptcy.

 

I know another 2 companies that are in the same situation and there is a good chance they will go down to zero. One is Cobalt Energy (CIE) and the other is Erin Energy (ERN). Unless oil suddenly jumps to over $100, these two companies may likely not be able to survive long, given high debt ratio with no free cash flow. Adding them as short positions may provide some hedge for your portfolio.