Shale Drillers Turn to Asset Sales as Early Swagger Wanes

Shale Oil: Who's in Trouble and in Distress?
  • Prized assets are going on the market after 50% oil decline
  • One in eight junk-rated energy firms risking default: Moody's

A renewed plunge in oil prices and the winding down of other financial lifelines is forcing shale drillers to auction off once-prized assets and settle for less in potential deals.

This week, companies such as Chesapeake Energy Corp. said they are embracing the strategy as they confront the reality of a prolonged, painful crash. While executives have assured investors that it won’t be a fire sale, recent deals suggest that prices have fallen significantly from even a few months ago, according to data compiled by Bloomberg.

With one-sixth of major independent oil and gas producers facing debt payments that are more than 20 percent of their revenue, austerity has replaced the swagger that characterized the earliest days of the oil bust. Contracts that locked in higher prices are expiring, leading banks to reduce credit lines in coming months. Drillers caught in the squeeze may be forced to auction off some of their best holdings to raise cash or accept more expensive financing to avoid bankruptcy, according to more than a dozen bankers, lawyers and company officials who specialize in energy deals.

“These companies are starting to be a little more realistic about their situation and to face up to the fact that they will probably have to do something they don’t want to do,” said Omar Samji, a partner in law firm Jones Day in Houston. “There’s not going to be an easy lifeline.”

The first wave of deals is already looming: sales of land holdings in prolific oil regions. Oil market gyrations since July have made valuations hard to pin down, dimming the outlook for sales of whole companies. Instead, executives are looking to shore up their balance sheets by selling land or wooing deep-pocketed private equity groups or hedge funds to invest in their operations in exchange for a share of revenue, Samji said.

Sales Announced

Cobalt International Energy Inc. sold off discoveries in Angola last month and EOG Resources Inc. has begun an auction for acreage in Colorado and Wyoming. Anadarko Petroleum Corp. said it will continue to weigh offers, and Chesapeake said Tuesday it’s still pursuing asset sales. The Oklahoma City-based producer is said to be seeking buyers for dry gas acreage in the Utica shale formation, according to people with knowledge of the matter.

“Chesapeake is not desperate,” Chief Executive Officer Doug Lawler told investors Tuesday. “We are not going to have a fire sale on any asset.”

Illustrating the tough choices companies are facing, W&T Offshore Inc. announced Sept. 1 the sale of acreage in West Texas’s Permian basin, the highest oil-producing area in the U.S., for $376 million. The price amounted to about $8,000 an acre, less than a fourth what was paid for similar land in another deal just months ago, according to an analysis by Raymond James.

The Houston-based producer spent $120 million more than it made during the first six months of the year, and has drawn about half of a $500 million bank loan. A sale of prime Permian acreage might allow W&T to double its liquidity, or the amount of money it has on hand in cash and credit to pay for drilling and other expenses, according to Bloomberg Intelligence.

Default Risk

The pressure is building for more such sales. As prices plunged last month to below $40 a barrel, one out of every eight junk-rated oil companies was in danger of defaulting -- the most since January 2010, according to Moody’s Corp. U.S. crude rose 2.1 percent to $45.08 a barrel at 10:40 a.m. in New York.

"The oil and gas sector had the highest number of negative speculative-grade rating actions for the month, with seven downgrades including three defaults," according to Standard & Poor’s. Ten companies out of the 60 in Bloomberg Intelligence’s index of North American producers spent 20 percent or more of their revenue on interest payments in the first half of the year, according to data compiled by Bloomberg --- a key sign of distress.

For companies including Magnum Hunter Resources Corp., Comstock Resources Inc. and two others, it was more than 30 percent, the analysis shows.

“The oil industry is going to have to reshape itself somewhat to fit this
market,” said Shahid Ghauri, a partner in law firm Jones Walker’s energy
practice. “The valuation of some of these companies may be too high. That’s why we could start to see some more deal activity in distressed situations.”

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