This year has turned out to be a roller coaster ride for the U.S. stock market. As the coronavirus pandemic continues to devastate the global economy, Royal Caribbean (NYSE:RCL), American Airlines (NASDAQ:AAL), and Occidental Petroleum (NYSE:OXY) could go belly up.
Having lost more than half of its value over the past year, Royal Caribbean Cruise bounced back Tuesday on hopes of a bailout. But President Trump’s assurances to cruise line companies won’t matter for Royal Caribbean.
Over the last three years, Royal Caribbean has paid out $1.8 billion in dividends and has spent $900 million on buybacks.
The company would’ve had enough rainy-day funds to survive a downturn; instead, management decided to spend it on avenues that would enrich themselves. So, bailing out the wealthy executives won’t be a good look for Trump.
Moreover, Royal Caribbean is registered in Liberia, a known tax haven. The company doesn’t pay the U.S. government any tax, so the chance of getting a bailout from American taxpayers is near zero.
The company’s debt has surged since 2015. A coronavirus-driven slowdown has killed the industry, making servicing the debt almost impossible. With no bailout in sight, bankruptcy looks inevitable for Royal Caribbean.
After my initial call on American Airlines, the stock has taken a thrashing.
Even in the absence of coronavirus, American Airlines was troubled by mass cancellations and a high debt burden. Coronavirus could be the final nail in the coffin.
The airline space is an extremely tough and capital-intensive business. An exogenous shock like coronavirus could have a devastating impact on the entire industry.
American Airlines is cutting capacity to counter collapsing demand. But with lower capacity comes lower cash flow and reduced ability to service the debt.
Worse, American Airlines has a current ratio of 0.45, suggesting it doesn’t even have enough assets to cover half of its short-term liabilities. Without a bailout, bankruptcy is inevitable.
Occidental Petroleum is feeling the heat of crashing crude prices. The company already announced a quarterly dividend cut of 86% to strengthen its balance sheet. But the long-term prospects look grim nonetheless.
While this was just a short-term measure, Russia and OPEC are hell-bent on bankrupting U.S. shale oil. Russia has already been taking steps to mitigate the damage from low oil prices. But U.S. shale oil producers have limited ability to withstand the same.
With high break-even prices and even higher debt, Occidental Petroleum might not be able to outlive a price war between OPEC and Russia.
The company took on enormous debt when it acquired Anadarco Petroleum. Occidental’s total debt stands at over $41 billion, and it only has $3 billion in cash. Plunging oil prices mean the company’s assets aren’t worth as much as they used to.
With no path to profitability, Occidental Petroleum’s business has become unviable. Bankruptcy could be the only way out.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: March 11, 2020 8:01 PM UTC