It’s 2016 all over again in the energy sector. Only this time the pain could be worse.
An oil price war between Russia and Saudi Arabia coupled with severe demand concerns stemming from the economic impact of the COVID-19 outbreak have once again caused investors to hit the eject button on the already-battered E&P industry.
Distressed exchanges, senior capital raises, and asset sales for debt reduction have been among last-resort tactics for oil & gas borrowers seeking to extend liquidity and maturity runways. But the investor exodus will likely reshuffle the strategy deck for many management teams, as sector valuations run lower and market liquidity dries out, according to multiple market participants tracking the selloff.
“As an investor, the only thing you can do now is go short, since nobody wants to touch this stuff,” said a portfolio manager who’s been involved in the sector. “Otherwise you wait for a Russia/Saudi deal to put a floor under prices, because most of the upstream sector doesn’t work at these levels, not even the majors.”
Another buysider offered a bleak assessment: “The US shale experiment is over. I predict about half of the oil and gas companies will restructure.”
Levered upstream borrowers – California Resources, Whiting Petroleum, Chesapeake Energy, and Antero Resources – face added near-term pressure due to maturity schedules and already-stressed balance sheets. And their best-laid plans could get scrambled by the prevailing oil market dynamic.
Antero, for example, is in pursuit of USD 1bn in asset sales this year, but has over USD 3bn of maturities, including its revolver, coming due through 2022. One of the maturities – a USD 952m 5.375% senior unsecured note due 2021 – is trading at 66 cents and a 33.7% yield this morning, according to MarketAxess. That’s compared to trades at 98 in mid-January.
“You could see [Antero] ditch asset sales given the market and instead attempt a distressed exchange,” said a sector analyst.
California Resources, which already has a pending exchange, announced this week it would cut capital investment, alluding to its “low-price playbook.” Chesapeake Energy has near-term, through relatively small, maturities, and its recently placed 11.5% second lien exchange note traded at 22 cents yesterday, potentially sapping investor appetitive for further liability management. Lawyers for parties involved in EP Energy’s bankruptcy noted yesterday in a status conference that the oil market turmoil could put its plan of reorganization at risk.
In another stark example of the disappearing energy investor, Laredo Petroleum’s USD 600m 9.5% senior unsecured notes due in 2025 – which were just placed in January – have traded down more than 60 points to 39.5 today.
Following the 2016 bankruptcy blitz, energy credits now account for USD 142bn of the overall high yield market, or roughly half compared to 2016. Further, the breakeven costs of shale producers have come down. But energy defaults will likely happen on a more sustained basis and thus outpace the 2016 downturn, according to a sector report from Morgan Stanley, published Monday.
“The combination of demand and supply shocks is likely to have a more persistent impact on the HY energy complex this time around,” the report says.
Looking further out on the horizon, the analysts note that Oasis Petroleum along with gassier names Southwestern, Gulfport, and Range Resources additionally face liability hurdles.
Capex cuts announced by upstream companies – Cenovus Energy, Parsley Energy, and Diamondback Energy, for example – lead what’s expected to be a broad reduction of E&P capital investment as a result of the drop in crude prices, sources noted.
The onshore and offshore oilfield services industries are likely to be devastated as a result, given their dependence on capex spending and the still-budding recovery in service rates, they added.
“The spread of the coronavirus affects the already weak OFS sector in three ways: supply-chain disruptions, weakening of demand for oilfield services, and further tightening of capital-markets access,” Moody’s wrote in a 10 March report.
Onshore fracking company FTS International has a USD 375m 6.25% senior unsecured note due in 2022 that trades today at 40, from 70 last week. TNT Crane has been rounding up lenders for a liability management exercise, and its first lien loans have dipped to trading quotes at 81/85, compared to the 90 area in mid-January, according to Markit.
Meanwhile, “The offshore drillers simply cannot catch a break,” analysts from CreditSights wrote in a Monday report. “The nascent and shallow recovery that has been moving in fits and starts will be heavily impacted by the lower crude price environment: dayrates and utilization are headed lower.”
Valaris, Noble Corp, Seadrill (Ltd and Partners), and Transocean already have over-levered balance sheets, and a depressed oil futures curve paints a grim picture for survival, sources noted.
Hornbeck Offshore, an offshore supply vessel operator, launched an exchange when Brent crude was above USD 50 per barrel, and faces holdouts on a 1 April maturity. The company said in a 2 March press release that it was exploring capital structure options with stakeholders after preliminary exchange results came in below the required threshold.
Adding to the pain, some of the offshore industry was able to survive the last crude price rout thanks to long-term drilling contracts stemming from when oil was above USD 90 per barrel, the CreditSights report says. “There are not many above-market contracts remaining […] so we expect to see cancellations negatively impact backlog.”