Energy Debt Sells Like It's 2014 Even With Crude Oil at $50By
Surge in issuance as bankruptcies drop, businesses stabilize
‘Still fair amount of skepticism’ from once-burned investors
The way energy companies are issuing debt, it feels like spring is in the air -- the spring of 2014.
Back then, the industry was riding high on $100-a-barrel oil, and companies were selling mountains of debt to fund ambitious growth strategies. It was a time when “almost anybody could bring an energy deal, and almost everybody tried,” said Scott Roberts, head of high-yield investments at Invesco Ltd. in Atlanta.
Then oil prices plunged, along with the fortunes of many borrowers. Crude hasn’t approached $100 since, but it has stabilized around $50, and that has energy companies returning to credit markets at the fastest pace in three years. This time, companies like Transocean Ltd. are looking to refinance more than to expand. And they’re finding pent-up investor demand that’s bolstering prices and giving issuers incentive to come forward, Roberts said.
“Fifty-dollar oil seems to be this psychological barrier where people don’t want to get left behind,” said Roberts, who oversees $5.5 billion in assets, including about $750 million in energy. “The bankers are calling any company that they can that has a need to refinance right now, when the market is strong and covenant protections are weakening.”
High-yield U.S. energy debt supply neared $7 billion in September and accounted for 31 percent of total issuance, the most in any month this year, data compiled by Bloomberg show. In investment grade, energy was the most robust non-financial sector last month, bringing in $15.2 billion on 19 deals.
The momentum has carried over into October, which has already priced $5.5 billion of high-yield energy debt -- the most for that entire month since 2012. Transocean sold $750 million of bonds Wednesday to pay down debt and was said to have received orders of as much as $2.4 billion. That followed an offering from Energy Transfer Equity LP, which boosted its deal to $1 billion from $750 million. Gulfport Energy Corp. joined the mix on Thursday, with a $450 million bond sale to repay outstanding borrowings. This all follows a week when energy accounted for a third of high-yield issuance.
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The market has returned to life as energy-sector bankruptcies have fallen sharply, the latest sign of stabilization. Through July this year, 14 North American oil and gas producers had sought bankruptcy protection, representing about $5.1 billion in debt, according to a report from Dallas-based law firm Haynes & Boone LLP. That compares with 55 companies in the same period last year.
And with U.S. oil and gas companies facing $71 billion of debt maturing in 2019, according to S&P Global Ratings, the timing of the revival couldn’t be better.
The rally in energy, which makes up about 14 percent of high-yield issuance, has helped boost the broader index, where yield-starved investors have welcomed offerings from even the junkiest of issuers. Amid their enthusiasm, the extra interest that speculative-grade bonds offer over risk-free Treasuries has dropped to a three-year low.
Oil prices briefly dipped below $50 a barrel for the first time in two weeks Wednesday as U.S. total crude surged and exports rose to a record high, reigniting fears of a global supply glut. Prices rebounded Thursday as Saudi Arabia and Russia, the world’s biggest oil exporters, signaled continued cooperation on efforts to distill such concerns.
To be sure, energy investors are more discerning than in 2014. The focus now is on business discipline and holding companies accountable on profitability, said Jim Brilliant, chief investment officer at Century Management Investment Advisors.
“There’s a growing confidence, but there’s still a fair amount of skepticism in the market on whether or not this is truly a sustainable move in oil,” said Brilliant, who has about 10 percent of his $67 million fund in energy. “There’s a big push now by not only lenders, but by investors to live within cash flows.”
While debt markets have proven receptive so far, the good times may not roll on if OPEC fails to keep a lid on production or if crude inventories don’t return to previous lower levels, S&P analyst Paul Harvey said in a report Tuesday. That may prompt banks to tighten up on energy, pushing some high-yield issuers into bankruptcy, he said.
“Lenders are tiring of supporting negative cash flows, particularly because of the relatively flat commodity prices,” said Harvey. “If this weariness leads lenders to stem their support by requiring more restrictive covenants or indentures that would limit negative cash flow, it would be a rude awakening for an industry that has typically put growth before positive cash flow.”
— With assistance by Gowri Gurumurthy, and Alex Nussbaum