This can’t keep up, and so it won’t.

The 15 largest U.S. oil and gas explorers and producers (not counting the integrated oil majors) outspent their operating cash flow by $71 billion between 2012 and 2014, will burn through another $27 billion this year and face another $22 billion deficit in 2016, according to a recent report by Oppenheimer & Co.

Meanwhile, the four integrated majors will need to come up with another $80 billion in excess of what they’re earning between this year and next, Oppenheimer projects. Other sources render industry financing estimates in the same ballpark.

The aggregate deficit looks especially daunting now that the industry has just about exhausted two crucial bottom-line cushions.

While 28% of North American oil and gas production is hedged for the remainder of this year, that number drops to 11% for 2016, according to a recent IHS survey. And in the meantime the huge drilling and production cost reductions  secured over the last year appear to be slowing with contractors squeezed drier than fracked shale.

None of this is good news for an industry that was already spending 83% of its operating cash flow on debt service in the year through June, according to the U.S. Energy Information Administration. That burden was set to increase based solely on the higher yields the bond market now demands from the drillers. The diminished cash flow from hedges and, potentially, from realized energy prices, will pile on more misery.

All of this means that balance sheet health and free cash flow will continue to grow in importance as the primary drivers of upstream share prices over the next year.

With so much past oil investment earning such ostentatiously negative market returns of late, the market will extract more than a pound of flesh from any producer that’s truly hard up. That will translate into drastic capital spending cuts that should accelerate the rollover in domestic energy production. But only the survivors will benefit from the eventual rebound in prices once the current supply glut is worked off.

That’s why we purged so many of the most leveraged portfolio recommendations over the last year, and their performance since more than justifies that exercise in risk avoidance. The question now becomes, have we purged enough? We’ve been especially concerned about current Growth Portfolio recommendation Chesapeake Energy (NYSE: CHK), which exemplifies the industry’s cash crunch.

Crunch Time for Turnaround Tale

After famously overspending during the good times under the leadership of since-exiled founder Aubrey McClendon, Chesapeake entered the downturn with too much debt, relatively high costs and insufficient focus on its most profitable acreage.

And while it’s made important progress on the focus and the costs under current CEO Douglass Lawler, those gains have been swamped by the decline in cash flow as a result of the lower oil and gas prices.

So, for example, Chesapeake has renegotiated its gathering and transportation agreements with Williams (NYSE: WMB) to save an estimated $700 million over the next three years.

But two-thirds of next year’s savings under the new deal will merely offset the scheduled increase in the company’s midstream expense based on agreements struck when Chesapeake was still a rapid grower hampered by a dearth of infrastructure.

Chesapeake suspended its common dividend in July, a move that will save it up to $240 million annually. It has also used asset sales to curb some of its overspending over the past two years. But the slump is limiting the value and flexibility it can extract from such transactions.

And in the meantime cash continues to dwindle. The company recorded $314 in cash from operating activities in the second quarter, when oil and gas were priced significantly higher than they have been since. In the same quarter it had $185 million of interest costs inclusive of capitalized interest, and paid another $43 million in preferred stock dividends. The remaining $86 million in cash from operating activities was dwarfed by the $862 million spent on drilling and completions.

Chesapeake drew down its cash by $2 billion over the last two quarters, and the $1.5 billion it expects to have left by the end of the year is likely to be spent plugging funding gaps in 2016.

There’s also the largely unspent $4 billion credit line, some of which will likely need to be tapped next year barring a big rebound in energy prices. The company recently renegotiated a restrictive leverage covenant that would have limited its use, securing the credit line with the bulk of its proved reserves.

While that assured liquidity into 2017, the move discounted Chesapeake’s unsecured bonds, whose holders lost precedence to bank creditors in the event of a bankruptcy. Downgrades by Moody’s and Standard & Poor’s followed, and some of the notes maturing between 2021 and 2023 now trade at roughly 70 cents on the dollar.

Both agencies kept the credit rating on watch for further downgrades, with Moody’s citing “the company’s likely declining production and reserve volumes in 2016 and the inherent challenges of completing asset sales to sufficiently reduce its debt balances in this negative industry environment.”

I reckon Chesapeake has until the end of 2017 to make ends meet before the money and the credit run out, and longer if it sells off more assets. That should give it enough time to survive until energy prices revive, though that’s obviously hardly a certainty at this point.

This is a stock that could possibly end up worthless or, somewhat more likely, could get bought out in a distress sale well below the current price down the road. But after wrestling with the temptation to purge it from the portfolio over the last week we’re going to stick with it, because if Chesapeake does survive it has the assets to be worth much more than this in a few years once energy prices normalize.

But it’s time to acknowledge that there will be no quick fix, and lots of bumps over the next year or two. We’re downgrading CHK to Hold and moving it to the Aggressive Portfolio.

Cabot Playing Long Game

We have many fewer worries about Cabot Oil & Gas (NYSE: COG), despite the subdued outlook the Marcellus gas producer provided recently after reporting its third-quarter results.

Cabot’s third-quarter production was up 7% year-over-year even though it’s down to three rigs in the Marcellus, from six a year ago. By year end it expects to have just two rigs there, yet still guided  for production growth of 2% to 10% in 2016, with the entire drilling budget covered by free cash flow.  And most of that spending will be on wells that may not be completed until 2017, when Chesapeake hopes to see its price realizations improve barring further delays to its Constitution Pipeline.

That project, which would bring Chesapeake natural gas from northeast Pennsylvania into central New York, has run into regulatory obstacles and opposition from environmentalists, however.

In any case, Cabot’s doomsday clock is ticking much more slowly than Chesapeake’s given its lower debt leverage and some of the lowest production costs in the industry. Growth Portfolio recommendation COG remains the #9 Best Buy below the reduced limit of $28.