Hungry Market Eats Up Oil Bonds
Drop in oil prices has producers raising cash
Investors are snapping up new stock and bonds from energy producers as they search for bargains amid the tumult caused by the plunge in oil prices.
The buyers are betting these companies can ride out the slump in crude and natural gas. Meanwhile, by selling stock now, companies are signaling they don’t see a quick rebound in commodity prices that would ease their funding woes and lift their shares.
U.S. and Canadian publicly traded exploration-and-production companies have sold more than $8.4 billion of new stock since the start of the year, a pace fast approaching the $10.5 billion of stock the group sold during all of 2014, according to a Wall Street Journal analysis of data from Dealogic and investment banks.
Meanwhile, some companies are taking on new debt, often paying high rates. Junk-rated oil-and-gas exploration and production firms have sold about $4.7 billion of bonds in the U.S. so far this year, up from $2.7 billion at this time last year, according to Dealogic.
The companies need to raise cash partly because another corner of Wall Street is getting more tightfisted: banks.
Twice a year, typically in the spring and fall, banks reassess the value of energy producers’ oil and gas reserves, which are used as collateral for asset-backed credit lines. The lenders adjust companies’ borrowing limits accordingly, moves that have some companies now on the hunt to replace funds.
On Monday, U.S. crude rose 39 cents to $50. It has dropped more than 50% since June.
Some investors are lured by cheap prices, while others are hoping to prop up companies in which they have already invested and keep creditors at bay. High interest rates on the new bonds—12% annually on some—are also attracting buyers at a time when rates on safe government debt are low.
“If you like a company, you can get something at half-price,” said John Groton, a senior equity research analyst at Thrivent Asset Management, an investment-management firm that oversees roughly $96 billion.
Comstock Resources Inc., Energy XXI Ltd. and Atlas Resource Partners LP are among companies that have sold debt lately in reaction to or in anticipation of cuts to their credit lines, the companies have said in filings and calls with analysts.
The deals can be a Faustianbargain. When these companies sell new shares to raise cash, for example, they are generally fetching far less for their stock than it was worth only months ago. And the issuance of new stock can hurt existing shareholders by diluting the values of their stakes.
But many companies see the move as the least painful way to raise cash. “They are saying prices are down and they may be down for a while longer,” said Robert Santangelo, who co-heads Credit Suisse Group AG ’s equity capital-markets business in the Americas. “It’s a very adult view of long-term value.”
Bonanza Creek Energy Inc., which drills in Colorado and Arkansas, watched its cash dwindle to $2.6 million, from $181 million, over the course of 2014, and its shares lose half their value since June. Then the company raised more than $200 million selling stock in February.
“I wasn’t thrilled by it, because you get some dilution, but it was the prudent thing for them to do,” said Bill Costello, an energy analyst at investment manager Westwood Holdings Group Inc., which owned Bonanza Creek shares. It bought more in the offering, which received heavy demand—orders arrived for about four times the amount of stock for sale, according to the company.
“Some companies are raising capital because they are under duress. We are raising capital because we want to remain competitively positioned,” said Bonanza Creek Chief Executive Richard Carty in an interview. Bonanza Creek used proceeds from the stock sale to pay the roughly $33 million balance on its credit line and said it would use the rest for drilling and other expenses.
In the U.S. debt market, the new sales are sometimes layered on top of existing bonds, sending prices of the earlier debt tumbling. Still, the demand for new debt securities reflects how this year has been a good one so far for junk-rated oil and gas producers. Bonds of these companies have returned 4.5% in 2015, including price changes and interest payments, according to data from Barclays PLC. Last year, the return on such bonds was negative 12%.
“Our market has the cash and is more than willing to help most of these companies get through to the other side of the low-oil-price environment,” said Scott Roberts, who helps oversee the $1.7 billion Invesco High Yield Fund, which has been buying bonds from low-rated energy companies recently.
There have been trouble spots: American Eagle Energy Corp. , a Denver company that sold debt in August, skipped its first interest payment to bondholders earlier this month, at least the third oil-and-gas producer to punt on a payment sincemid-February. One of the others, BPZ Resources Inc., a Texas-based company that prospects in Peru, filed for bankruptcy protection Monday evening. Separately, Dune Energy Inc. filed for bankruptcy protection Sunday after falling oil prices led it to trip loan terms and its lenders limited how much the company could borrow.
The stock sales have mostly received warm welcomes, with shares rising when they hit the market, though there have been stumbles. Goodrich Petroleum Corp. had little trouble last week selling $49.8 million of stock as well as loans to replace some of its bank credit. Though the new shares were quickly sold in the hours before the market opened March 2, Goodrich stock lost 12% during the trading day.
The offering gave Goodrich “liquidity and comfort through 2016” should oil prices remain in their current range, said Robert Turnham, the company’s president. “It is painful to suffer the dilution, but it ensures you get to the other side of the abyss.”
Source: WSJ – Hungry Market Eats Up Oil Bonds
