Junk Energy Firms Still Have Market Access

 

Bankers who have been talking regularly to energy firms said at least a dozen companies are in a position to raise debt to refinance bank loans or existing bonds in coming months.

 

One banker said the next primary deal in the sector could come as soon as next week if conditions remain supportive.

 

Investors have generally been amenable to buying bonds from credits that diligently repaired their balance sheets over the past several months and are now on firmer grounds to withstand lower prices.

 

A tightening of credit spreads amid a global hunt for yield has also helped support bond prices in the energy sector, especially for low-cost producers and midstream companies.

 

As US crude plunged by 20% from its June highs, the average yield on junk-rated energy bonds has hovered around 9.5% - a far cry from the 12.5% seen in April, when oil was last around the current US$41 a barrel.

 

Extraction Oil & Gas in July became the second exploration and production company to price an unsecured bond this year, upsizing the five-year issue to US$550m from the US$500m initially targeted.

 

The Denver-based producer will use proceeds from the deal - which was priced to yield 7.875%, inside talk of 8% area - to refinance second-lien debt as it prepares to go public.

 

Credits similar to Extraction - privately held companies with expensive bank debt considering an IPO - as well as good quality credits with high-coupon bonds outstanding are all seen as potential candidates to tap the market.

 

Some of the companies that could easily tap bond investors are independent oil and gas producers in the sought-after Permian basin such as Diamondback Energy, RSP Permian and Concho Resources.

 

"If you have outstanding bonds that are yielding less than 7.5%, you have access to market," said the banker.

 

Concho could be an obvious candidate for refinancing as its US$600m 2021s carry a coupon of 7% but trade at a much tighter yield - around 5.7%.

 

"It's not something they have to do, but trades like that make sense," said the banker.

 

Outside of refinancing attempts, however, opportunities for new debt offerings appear limited.

 

Wary of adding leverage to their business, a number of independent producers have recently opted to finance asset purchases with equity rather than debt.

 

In spite of its strong credentials in the bond market, Diamondback raised US$490m in equity in July to buy new acreage in the Delaware basin.

 

And investors still have sufficient appetite for equity as many see it as an opportunity to capture additional gains if oil prices ultimately recover.

 

Nonetheless, some of the companies that were preparing to tap the market over the summer after posting their quarterly earnings may ultimately decide to wait if oil prices don't recover from current levels.

 

"Even if they don't work at US$40, companies that make up the bulk of the (high-yield energy) index have long liquidity runways," said James Spicer, an analyst at Wells Fargo Securities.

 

"A lot of them have repaired their balance sheets over the past few months and can afford to wait and be opportunistic."


(Reporting by Davide Scigliuzzo; Editing by Shankar Ramakrishnan and Matthew Davies)