Energy’s Drunken-Sailor Legacy Hangs Over Debt Rescue Plans

Updated on
  • $44.5 billion of maturities face troubled oil and gas issuers
  • Lenders face pressure from bank regulators to hold back

Debt-laden energy companies that still don’t have a financial escape plan in place are running out of time and willing lenders even after oil doubled from its February lows.

Crude prices topping $50 a barrel helped to ease pressure on distressed energy companies, allowing at least 27 issuers to sell $16 billion of junk-rated bonds in last year’s final quarter, according to data compiled by Bloomberg. That still leaves about $44.5 billion maturing by the end of 2020, according to Fitch Ratings. A "mountain" of more than $18 billion in credit-line commitments comes due in 2019, said Spencer Cutter at Bloomberg Intelligence.

Those still vying for new capital such as Vanguard Natural Resources LLC and Pacific Drilling SA need prices above $55 to $60 to win over lenders, according to credit analysts. What’s more, banks face tougher limits from U.S. regulators on energy loans, spurred by memories of previous booms and busts.

Creditors remain mindful that drillers "get very happy about their cash flow” during good times, Evercore ISI analyst James West said. “And when financial markets become wide open, they spend like drunken sailors."

Borrowers are trying to avoid the fate of more than 230 exploration, drilling, production, servicing, transportation and storage companies that have gone bankrupt since the start of 2015, affecting about $96.2 billion of debt, according to data tracked by the Haynes and Boone law firm.

Despite last year’s rally, oil prices are still down from more than $107 a barrel in mid-2014, making debt loads based on those near-record levels unaffordable. Lenders may want to see sustained prices of at least $55 a barrel before agreeing to extensions, Cutter said.

Even then, bankers may hesitate because regulators issued stricter leverage guidelines last year on energy lending that suggests limiting debt to four times adjusted earnings. Approach Resources Inc., a Fort Worth, Texas-based producer, cited the cap as one motive for its pending debt-for-equity swap, telling investors it could chop leverage to 3.5 this year from 9.6 in 2016’s fourth quarter.

Last year’s oil price rally spurred some investors toward the “junkier names,” said William Costello, senior portfolio manager and research analyst at Westwood Holdings Group Inc., but he doesn’t see that as a winning formula.

“The caution phase is behind us; I don’t necessarily think it should be,’’ said Costello, whose Dallas-based firm manages about $21.3 billion in assets.

Companies without a foothold in the most profitable drilling areas, especially the Permian shale basin in Texas and New Mexico, will still struggle to perform, he said.

Seeking Solvency

Vanguard had about 6 percent of its oil and gas acreage in the Permian as of October. Banks cut the company’s credit line a second time late last year, leaving it overdrawn, and Houston-based Vanguard has said bankruptcy “may be unavoidable." Pacific Drilling, the ultra-deepwater driller with operations headquartered in Houston, said debt talks stalled after creditors demanded a bigger equity stake, and S&P Global Ratings is predicting no recovery for offshore contract drilling services until 2019.

Representatives for Vanguard and Pacific Drilling didn’t respond to messages seeking comment. Pacific Drilling has said it expects cash will last through 2017.

For those that do find a solution, the rewards can be substantial. Bonds issued by Chesapeake Energy Corp., which conducted more than a dozen debt deals, accounted for six of the 10 best-performing energy sector bonds in the Bloomberg Barclays U.S. Corporate High Yield Index in 2016, with each returning over 240 percent, according to BI calculations. S&P, which had added Chesapeake to its list of "weakest links" last year, now has the CCC+ rated company on its roster of issuers it might upgrade.