Is There Any Equity Value Left In Anglo American plc, Standard Chartered PLC And Gulf Keystone Petroleum Limited?

Equity value is the value of a company available to owners or shareholders and is a vital measure of business performance. 

Simply put, equity value measures the balance sheet of a business, accounting for all of its current stocks, debt and cash, as well as other long-term liabilities, such as the value of stock options, convertible securities, and other potential assets or liabilities. The measure gives an indication of potential future value and growth potential.

For a business to be viable, equity value should be positive. However, if equity value is negative, it’s an indication that there’s no value in the enterprise for owners and shareholders. 

Shareholders of Anglo American (LSE: AAL), Gulf Keystone Petroleum (LSE: GKP) and Standard Chartered (LSE: STAN) could be faced with this prospect as debts and long-term liabilities for these companies are now starting to exceed assets. 

A commodity casualty 

Over the past five years, more than 90% of Anglo American’s equity value has disappeared as the company’s shares have slumped to an all-time low. And now the company’s total net debt pile of around $15bn is nearly three times more than Anglo’s market cap — a big red flag. 

Nevertheless, Anglo’s management has already come out with a debt reduction plan, which will see the group shed two-thirds of its operations.

But as commodity prices remain volatile, it remains to be seen if this will be enough for Anglo to repair its balance sheet and return to growth. In fact, analysts at Citigroup believe that there’s now a 25% chance that Anglo’s equity could be worthless, an extremely worrying statistic for investors. 

Waiting for payment 

The oil price slump has hit Gulf Keystone harder than most small oil producers. The company’s towering debt pile is sucking up all of the company’s cash flow in interest payments. According to City analysts, if the price of oil doesn’t stage a recovery in the second half of the year, Gulf Keystone will struggle to make its October interest payment. 

It has been rumoured for some time that Gulf Keystone’s bondholders have been increasing their pressure on the company to do something about its finances. According to a report from Bloomberg, the company’s bondholders have already started preparing for a potential debt restructuring this year. Only time will tell if this is really the case. 

Still, it’s clear that Gulf Keystone is running out of cash and is now at the mercy of the oil markets. 

Oil market exposure

Standard Chartered is also at the mercy of the oil markets as it’s suffering from what CEO Bill Winters has called a legacy of “growth over risk discipline”. His policy of quantity over quality is now coming back to haunt the bank. A spike in losses on legacy loans is eating away at Standard’s capital reserves.

As I’ve written before, City analysts have estimated that around 20% of Standard’s total loan book is linked, directly and indirectly, to the commodity market — approximately $61bn in dollar terms, roughly 140% of the bank’s tangible net worth. Of this $61bn, around $25bn of these loans are to the oil and gas sector. 

A sudden spike in loan losses could wipe out Standard’s equity value overnight.