W&T Offshore’s Bond Swap Offloads Some Debt But Not All Doubts

  • S&P says cash may run short in as little as 12 months
  • Moody’s predicts liquidity will be adequate through 2017

W&T Offshore Inc.’s debt swap may stall but not stem concerns about how the oil and gas producer will ride out the industry’s slump.

Both S&P Global Ratings and Moody’s Investors Service upgraded Houston-based W&T after it completed a bond exchange Sept. 8 that cut debt by $408 million for the money-losing driller. But they split over the outlook, with S&P saying W&T could still run out of cash in the next 12 months and Moody’s predicting liquidity will be adequate through 2017.

“They had a bit of a gun to their head; now they don’t,” said Spencer Cutter, an analyst who follows distressed energy companies at Bloomberg Intelligence. The debt exchange “buys the company some time, but it doesn’t fix their leverage problem.”

Lisa Elliott, an outside spokeswoman for W&T, declined to comment on the ratings reports and the company’s financial condition.

W&T and its exploration and production peers have been restructuring debt, hoping to ride out a two-year rout in energy prices. The company exchanged $710.2 million of its 8.5 percent senior notes due in 2019 for a combination of stock and new pay-in-kind toggle securities that have longer maturities.

More than 100 North American oil and gas producers have gone bankrupt since the start of 2015, according to the Haynes & Boone LLP law firm, and a separate report from Moody’s Investors Service showed that more than half of U.S. exploration and production companies that conducted debt swaps in 2015 later went bankrupt.

Cash Levels

S&P upgraded W&T to CCC with a negative outlook from selective default on Sept. 13. Moody’s followed on Sept. 15, raising W&T’s rating to Caa2 from Caa3 with a stable outlook.

Debt leverage is expected to remain at “unsustainable” levels over the next two years, Kevin Kwok, an S&P credit analyst, wrote in his report. Kwok cited declining production and cash flows, higher costs and the potential that banks may reduce its credit line early next year. Analysts led by Amol Joshi at Moody’s wrote W&T has adequate cash to cover basic needs through 2017, and the driller has “a good track record of success with exploration activity.”

Both cautioned that the federal Bureau of Ocean Energy Management, which oversees oil and gas production in U.S. waters, ordered the company to post $260.8 million for security on offshore leases. The company, which operates in the Gulf of Mexico, has said it appealed and obtained a stay while it negotiates a settlement.

W&T has posted seven consecutive quarters of losses as U.S. benchmark crude prices, which topped $100 a barrel in 2014, slid to less than $45 at current levels. Chief Executive Officer Tracy Krohn said in a Sept. 8 statement after completing the debt swap that “the company is now in a better position to take advantage of upside opportunities in our quality asset base and benefit from the eventual upcycle in the market, as well as other opportunities.”

Krohn holds about 30.6 percent of the common shares, according to data compiled by Bloomberg.

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