Shell Tarred by Gulf Spill Pays Premium on Bond: Credit Markets
Royal Dutch Shell Plc was penalized by the bond market in a $2.75 billion debt offering and Anadarko Petroleum Corp. notes tumbled on concern the worst oil spill in U.S. history will depress profits across the industry.
Investors demanded an extra 110 basis points in yield over U.S. Treasuries to buy the five-year notes from Shell, compared with 89 basis points for existing debt of similar maturity from The Hague-based company. Debt of Anadarko, owner of a 25 percent stake in BP Plc’s leaking well in the Gulf of Mexico, fell yesterday the most since June 9.
Shell, with the most Gulf rigs affected by a ban on deep- water drilling, faces higher yield spreads as investors wager that the U.S. government will increase regulation, while Anadarko may face costs related to the BP spill. The explosion of the Deepwater Horizon oil rig two months ago is rippling across petroleum companies, said Brookfield Investment Management Inc.’s Joel Levington.
“It could delay the timing of projects or possibly eliminate them,” said Levington, managing director of corporate credit at Brookfield in New York, with $24 billion in assets under management. “It could require additional monitoring and maintenance, all of which could hurt earnings, cash flows and returns on invested capital.”
Energy bonds have lost 0.34 percent this month, compared with a gain of 0.56 percent for U.S. investment-grade bonds, according to Bank of America Merrill Lynch index data. Shell bonds have gained 0.09 percent in June.
Bond Sales Surge
Elsewhere in credit markets, sales of corporate bonds are increasing, with HeidelbergCement AG, the world’s third-largest cement maker, and ENI SpA, Italy’s biggest energy company, leading issuance in Europe today.
Companies around the world issued $17 billion of notes yesterday, more than three times the daily average of the past two months, according to data compiled by Bloomberg.
The Heidelberg, Germany-based building materials company is offering 500 million euros ($614 million) of bonds due December 2015 that may be priced to yield about 7.25 percent, more than the 6.75 percent it paid when it raised 650 million euros of similar-dated notes in January. ENI in Rome is selling 10-year securities that pay interest of about 110 basis points to 115 basis points more than the swap rate, a banker familiar with the deal said.
Sales rose as the extra yield investors demand to own corporate bonds instead of government debt fell 2 basis points to a three-week low of 194 basis points, or 1.94 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.08 percent.
Benchmark indicators of credit risk in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 1.4 basis points to a mid-price of 109.25 basis points as of 11:51 a.m. in New York, the first increase since June 9, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 5.4 basis points to 118, Markit prices show.
Both indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Shell has five exploratory wells among 33 in deep Gulf waters that were set to halt drilling under a moratorium from the Obama administration following the BP accident, an official of the Minerals Management Service, who asked not to be identified discussing the specific companies, said May 28.
“The offshore drilling moratorium will be costly for producers, which will need an extended period to ramp back to pre-accident levels once the ban is lifted,” Ken Austin, a Moody’s senior credit officer in New York, wrote in a report yesterday. “These companies also face significant questions over whether they will be able to cancel or reduce the costly commitments under their rig and service contracts.”
The spread on Shell’s $1 billion of six-year notes issued in September widened to 103.4 basis points yesterday from 89.3 basis points as of June 10, the last trade before news of the offering, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Shell’s $1.75 billion of 3.1 percent notes due in June 2015 yield 3.115 percent, Bloomberg data show. Its $1 billion of floating-rate debt yields 35 basis points more than the three- month London interbank offered rate, a borrowing benchmark.
“The all-in yields are still pretty attractive from a treasurer’s perspective, but obviously they’re paying for their association with the oil-and-gas business,” said Jason Brady, a money manager who oversees $4 billion in fixed-income assets at Thornburg Investment Management in Santa Fe, New Mexico.
Shell posted a 57 percent increase in earnings to $5.48 billion in the first quarter, its biggest profit since 2008. Year-on-year profit fell more than 60 percent in three of the previous four quarters.
Shell spokeswoman Kirsten Smart declined to comment on the sale.
Total SA, Europe’s third-largest oil company, sold $2.5 billion of bonds on June 17 in a two-part offering. The Paris- based company’s 3 percent, five-year notes priced to yield 110 basis points more than similar-maturity Treasuries, Bloomberg data show.
Anadarko’s 5.95 percent securities due in 2016 declined 2.7 cents to 88.1 cents on the dollar yesterday to yield 8.45 percent, or 642 basis points more than similar-maturity Treasuries, Trace data show. The notes traded at 110.9 cents on April 19, the day before the oil spill. The securities fell another 0.56 cents to 87.5 cents on the dollar as of 11:50 a.m. in New York.
“I think the credit markets have downgraded all of the spill companies by several notches,” said Brookfield’s Levington. “The rating agencies are trying to catch up with what the markets have already done.”
The downgrade “is very disappointing and surprising in light of Anadarko’s limited role as a non-operating investor in the Macondo well,” Robert Gwin, chief financial officer of the company, said in a statement June 18.
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