Updated: Shale oil companies facing credit crunch by Dawn Kopecki, Christine Idzelis and Bradley Olson, April 1, 2015, Bloomberg
Lenders are preparing to cut the credit lines to a group of junk-rated U.S. shale oil companies by as much as 30 percent in the coming days, dealing another blow as they struggle with a slump in crude prices, according to people familiar with the matter.
Sabine Oil & Gas Corp. became one of the first companies to warn investors that it faces a cash shortage from a reduced credit line, saying Tuesday that it raises “substantial doubt” about the company’s ability to continue as a going concern. About 10 firms are having trouble finding backup financing, said the people familiar with the matter, who asked not to be named because the information hasn’t been announced.
April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend. And that will only squeeze companies’ ability to produce more oil.
“If they can’t drill, they can’t make money,” said Kristen Campana, a New York-based partner in Bracewell & Giuliani LLP’s finance and financial restructuring groups. “It’s a downward spiral.”
Sabine, the Houston-based exploration and production company that merged with Forest Oil Corp. last year, told investors Tuesday that it’s at risk of defaulting on $2 billion of loans and other debt if its banks don’t grant a waiver. Publicly traded firms are required to disclose such news to investors within four business days, under U.S. Securities and Exchange Commission rules. Some of the companies facing liquidity shortfalls will also disclose that they have fully drawn down their revolving credit lines like Sabine, according to one of the people.
The companies are among speculative-grade energy producers that were able to load up on cheap debt as crude prices climbed above $100 a barrel. The borrowing limits are tied to reserves, the amount of oil and gas a company has in the ground that can profitably be extracted based on its land holdings. With oil prices plunging below $50 from last year’s peak of $107 in June, some are now fighting to survive.
Borrowing to Drill
Those loans are typically reset in April and October based on the average price of oil over the previous 12 months. That measure has dropped to about $80, down from $99 when credit lines were last reset. That represents billions of dollars in reduced funding for dozens of companies that relied on debt to fund drilling operations in U.S. shale basins, according to data compiled by Bloomberg.
All of this means that the squeeze happening now will only get worse as companies’ hedges against price declines start to roll off, said Bracewell & Giuliani’s Campana.
“People are expecting a much bigger rush of restructuring and negotiations in the fall,” she said in a telephone interview Tuesday.
Samson Resources Corp., an oil and natural gas producer controlled by private equity firm KKR & Co., warned investors that bankruptcy may be its best option as collapsing crude prices erode its ability to repay debt.
Its borrowing base may be reduced due to weak oil and gas prices, requiring the company to repay a portion of its credit line, according to a regulatory filing on Tuesday. That could “result in an event of default,” Tulsa, Oklahoma-based Samson said in the filing.
Many producers have been raising money in recent weeks in anticipation of the credit squeeze, selling shares or raising longer-term debt in the form of junk bonds or loans.
Energy companies issued more than $11 billion in stock in the first quarter, more than 10 times the amount from the first three months of last year, Bloomberg data show. That’s the fastest pace in more than a decade.
Breitburn Energy Partners LP announced a $1 billion deal with EIG Global Energy Partners earlier this week to help repay borrowings on its credit line. EIG, an energy-focused private equity investor in Washington, agreed to buy $350 million of Breitburn’s convertible preferred equity and $650 million of notes, Breitburn said in a March 29 statement.
Standard & Poor’s had warned in January that it might downgrade Breitburn’s ratings over concerns the Los Angeles- based oil producer would see cash shortfalls when its borrowing base is revised in April. Breitburn’s credit line was cut 28 percent to $1.8 billion and outstanding borrowings will be reduced to $1.24 billion with proceeds from the deal with EIG, according to the statement and Bloomberg data.
“Banks are not in the business of lending to distressed companies,” Campana said. “Most of the banks want to be refinanced or they want to see the money come from somewhere else.” [Emphasis added]
Shale on sale as oil price crash creates buyers’ market by Bradley Olson and Matthew Monks, March 11, 2015, Bloomberg
A decision by Whiting Petroleum Corp., the largest producer in North Dakota’s Bakken shale basin, to put itself up for sale looks to be the first tremor in a potential wave of consolidation as $50-a-barrel prices undercut companies with heavy debt and high costs.
For the first time since wildcatters such as Harold Hamm of Continental Resources Inc. began extracting significant amounts of oil from shale formations, acquisition prospects from Texas to the Great Plains are looking less expensive.
Buyers are ultimately after reserves, the amount of oil a company has in the ground based on its drilling acreage. The value of about 75 shale-focused U.S. producers based on their reserves fell by a median of 25 per cent by the end of 2014 compared to 2013, according to data compiled by Bloomberg. That’s opening up new opportunities for bigger companies with a better handle on their debt, said William Arnold, a former executive at Royal Dutch Shell Plc.
“In this market, there are whales and there are fishes, and the whales are well armed,” said Arnold, who also worked as an energy-industry banker and now teaches at Rice University in Houston. “There are some very vulnerable little fishes out there trying to survive any way they can.”
Smaller producers with significant debt that depend on higher prices to make money are the most likely early targets for buyers such as Exxon Mobil Corp. or Chevron Corp., companies that have bided their time for years as the value of some shale fields soared to $38,000 an acre from $450 just a few years earlier.
The market crash is creating “a consolidation game,” Concho Resources Inc. chief executive Timothy Leach said on a Feb. 26 call with investors. “It’s harder to be a small company today than it has been in the past.”
In the pre-plunge days, acquisitions were dominated by foreign buyers overpaying to get a seat at the shale boom table. That buying frenzy was followed by an explosion in asset sales as companies pieced together their ideal drilling portfolios. Joint ventures were a popular way of funding what seemed like an unstoppable drilling machine.
Now, an expected surge of deals is more likely to feature fire sales by companies unable to pay expenses [Because of greed-induced millions in interest payments?], falling asset prices and a widening division between the haves and have-nots.
Sellers will be companies like Whiting, handicapped by heavy debt and lacking the cash reserves or hedging contracts that would have provided some insulation from the market crash. Among the three biggest producers in North Dakota — Whiting, Continental and Oasis Petroleum Inc. — the value per-barrel of reserves has fallen by about half since June, the data show, meaning those reserves would cost a buyer half what they were worth eight months ago.
Exxon is the only major oil company with a AAA credit rating, which gives it unparalleled borrowing power for financing deals. More importantly, the company has $226 billion of its own shares stashed away from buybacks that it could use to buy other companies. That was how Exxon paid for Mobil in 1999 and XTO Energy Inc. in 2010.
Chevron holds $43 billion of its own shares in its treasury alongside $13 billion in cash, and the company has ample ability to borrow.
An analysis by Wolfe Research LLC’s Paul Sankey found the likeliest takeover candidates among major U.S. and Canadian producers included Continental, Apache Corp., Devon Energy Corp. and Anadarko Petroleum Corp. Those companies are big enough to help a buyer such as Exxon gain oil reserves at a cheaper price compared to peers, Sankey wrote Feb. 2.
In the headiest days of the shale-buying spree, executives including Occidental Petroleum Corp. CEO Stephen I. Chazen swore off deal-making, saying it would be more profitable to focus on developing the assets they’d already acquired.
Now they’re singing a different tune.
For the first time in years, EOG Resources Inc. Chairman and CEO William R. Thomas said Feb. 25 the company was weighing larger deals to scoop up acreage at a bargain, departing from its usual preference for more incremental purchases. Exxon Chairman and CEO Rex Tillerson suggested last week at an investor presentation in New York that the global oil giant is keeping its eyes open for opportunities in the downturn.
Whiting has reached out to potential buyers including Statoil ASA about a sale, people familiar with the matter said this week.
The company took on $2.2 billion in additional debt for its $6 billion acquisition last year of fellow shale producer Kodiak Oil & Gas Corp., just as crude prices had begun a decline from more than $100 a barrel to less than $50 at the start of the year.
The Denver-based company would be an attractive target for Exxon, Chevron or Hess Corp., all of which have operations in North Dakota and would benefit from scaling up, according to a Bank of America Corp. note to investors Monday.
Spokesmen for Exxon, Statoil, Chevron and Hess declined to comment on their potential interest in buying shale companies. Spokesmen for Anadarko, Apache and Devon declined to comment about their interest in selling.
Buyers will probably have to use their stock to purchase smaller operators, which don’t want to take cash at the bottom of the market, said Mike Bock, co-founder of energy investment bank Petrie Partners LLC of Denver. Bock spoke generally about potential energy mergers and declined to comment specifically on Whiting, as his firm has done business with the company in the past.
‘Stock for Stock’
“Now is the time to do a stock-for-stock deal,” Bock said. “For the most part, it’s going to be unconventional players combining.”
Since oil company shares have fallen alongside the market crash, an equity deal allows both buyer and seller to reap the upside when shares gain in a recovery, said Tim Balombin, an energy investment banker with Wells Fargo & Co.
Whiting has fallen 54 per cent since June, about the same as oil prices in that time. The Standard & Poor’s 500 energy producer index has declined 33 per cent, according to data compiled by Bloomberg.
As oil prices have stabilized this year, Whiting has climbed 13 per cent.
“The companies that have good currency in their stock are willing to deploy it aggressively,” Balombin said in a telephone interview. “The best companies that come out of these downturns come out of it bigger and stronger.” [Emphasis added]
Oil Bust Threatens CMBS in Wall Street Funded Shale Towns by Sarah Mulholland, March 5, 2015, Bloomberg
The oil glut is threatening to expose cracks in the commercial-mortgage bond market. Nomura Holdings Inc. estimates that $16 billion in property debt that has been sold to investors as securities is vulnerable to default after crude prices plunged, posing risks for the economies of U.S. cities and towns built around the boom. …
“If this oil story persists, oil workers are going to go someplace else — they’re transient,” Overby, a New York-based analyst at the bank, said in a phone interview. “Demand is going to go from very high to zero overnight, and that’s a problem.”
Small cities far from major metropolitan areas like those on North Dakota’s Bakken shale formation pose the biggest risk to CMBS investors, the Nomura analysts said in a Jan. 29 report. Their economies rely heavily on the energy business and grew exponentially as shale drillers arrived, the analysts wrote.
One such community is Williston, North Dakota. Wall Street banks bundled debt on a dozen properties in Williston with other commercial mortgages into bond offerings sold in 2013 and 2014, according to Morgan Stanley. The majority of the loans are secured by apartment complexes and hotels built during the last five years as more than 200 oilfield-service firms moved into the town, according to Richard Hill, a real estate debt analyst at Morgan Stanley. “There is increased risk that vacancies rise at these properties, bringing into question their long-term viability,” Hill said in an e-mail.
The risk of being on the wrong end of a boom-and-bust cycle is easy to spot in a recent prospectus for commercial-mortgage bond buyers. At Sand Creek Estates, a mobile-home park in Williston, about 179 of 225 pads are leased to corporate tenants, with the two largest being oil-service providers, according to documents provided to potential investors in a $1 billion CMBS offering issued in December.
The boom in oil production coincided with the resurgence of the commercial-mortgage backed securities market, where property owners can finance just about any building that produces rental income. Bond sales linked to everything from skyscrapers to strip malls are surging amid a recovery in real estate values after issuance froze for more than a year in the wake of the financial crisis.
Concern among investors is mounting that lenders are lowering their standards amid the rush to sell new bonds, making it easier for borrowers to fund potentially unstable projects. Looser underwriting standards in the CMBS market are enabling landlords with subpar properties to pile on large amounts of debt, Moody’s Investors Service said in a January report.
A $20 million loan linked to two apartment complexes in Williston ran into trouble even as oil was surging, before reaching more than $100 a barrel in June. The owner of the Strata Estate Suites stopped making monthly payments in December 2013, just five months after the mortgage was packaged with real estate debt from across the U.S. and sold to investors in a $1 billion commercial-mortgage bond offering, according to data compiled by Bloomberg.
The complexes were being run like extended-stay hotels, with no leases in place, according to loan-servicer documents. LNR Property, the firm negotiating with the borrower on behalf of bondholders, is still trying to resolve the issue and may end up foreclosing on the property, the documents show. Hayley Cook, a spokeswoman for LNR, declined to comment on the loan.
The Strata Estate highlights the kind of makeshift operations that spring to life to accommodate a ballooning population. Lenders may encounter similar issues should more loans start to sour in areas that have been propped up by oil production, according to Nomura’s Overby.
Moody’s flagged the potential dangers of inflated apartment rents in North Dakota to commercial-mortgage bond buyers in a March 2014 report. “Valuations could implicitly assume that rents are sustainable or neglect to address the high level of volatility associated with rapid growth in small towns,” Moody’s analysts led by Tad Philipp wrote in the report. [Emphasis added]
Art Berman- Shale Plays Have Years, Not Decades by HGSfrontpage, March 2, 2015
Art Berman talks to HGS about his research into the economics of unconventional plays. He tells the audience that the ultimate reserves of shale oil and gas are limited, and overstated to the general public. Recorded February 23, 2015.
And these bonds – they’re called “junk bonds” for a reason – are already cracking. Busts start with small companies and proceed to larger ones. “Bankruptcy” and “restructuring” are the terms that wipe out stockholders and leave bondholders and other creditors to tussle over the scraps.
Early January, WBH Energy, a fracking outfit in Texas, kicked off the series by filing for bankruptcy protection. It listed assets and liabilities of $10 million to $50 million. Small fry.
A week later, GASFRAC filed for bankruptcy in Alberta, where it’s based, and in Texas – under Chapter 15 for cross-border bankruptcies. Not long ago, it was a highly touted IPO, whose “waterless fracking” technology would change a parched world. Instead of water, the system pumps liquid propane gel (similar to Napalm) into the ground; much of it can be recaptured, in theory.
Ironically, it went bankrupt for other reasons: operating losses, “reduced industry activity,” the inability to find a buyer that would have paid enough to bail out its creditors, and “limited access to capital markets.” The endless source of money without which fracking doesn’t work had dried up.
On February 17, Quicksilver Resources announced that it would not make a $13.6 million interest payment on its senior notes due in 2019. It invoked the possibility of filing for Chapter 11 bankruptcy to “restructure its capital structure.” Stockholders don’t have much to lose; the stock is already worthless. The question is what the creditors will get.
It has hired Houlihan Lokey Capital, Deloitte Transactions and Business Analytics, “and other advisors.” During its 30-day grace period before this turns into an outright default, it will haggle with its creditors over the “company’s options.”
On February 27, Hercules Offshore had its share-price target slashed to zero, from $4 a share, at Deutsche Bank, which finally downgraded the stock to “sell.” If you wait till Deutsche Bank tells you to sell, you’re ruined!
When I wrote about Hercules on October 15, HERO was trading at $1.47 a share, down 81% since July. Those who followed the hype to “buy the most hated stocks” that day lost another 44% by the time I wrote about it on January 16, when HERO was at $0.82 a share. Wednesday, shares closed at $0.60.
Deutsche Bank was right, if late. HERO is headed for zero (what a trip to have a stock symbol that rhymes with zero). It’s going to restructure its junk debt. Stockholders will end up holding the bag.
On Monday, due to “chronically low natural gas prices exacerbated by suddenly weaker crude oil prices,” Moody’s downgraded gas-driller Samson Resources, to Caa3, invoking “a high risk of default.”
It was the second time in two months that Moody’s downgraded the company. The tempo is picking up. Moody’s:
The company’s stressed liquidity position, delays in reaching agreements on potential asset sales and its retention of restructuring advisors increases the possibility that the company may pursue a debt restructuring that Moody’s would view as a default.
Moody’s was late to the party. On February 26, it was leaked that Samson had hired restructuring advisors Kirkland & Ellis and Blackstone’s restructuring group to figure out how to deal with its $3.75 billion in debt. A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. KKR has written down its equity investment to 5 cents on the dollar.
This is no longer small fry.
Also on Monday, oil-and-gas exploration and production company BPZ Resources announced that it would not pay $62 million in principal and interest on convertible notes that were due on March 1. It will use its grace period of 10 days on the principal and of 30 days on the interest to figure out how to approach the rest of its existence. It invoked Chapter 11 bankruptcy as one of the options.
If it fails to make the payments within the grace period, it would also automatically be in default of its 2017 convertible bonds, which would push the default to $229 million.
BPZ already tried to refinance the 2015 convertible notes in October and get some extra cash. Fracking devours prodigious amounts of cash. But there’d been no takers for the $150 million offering. Even bond fund managers, driven to sheer madness by the Fed’s policies, had lost their appetite. And its stock is worthless.
Also on Monday – it was “default Monday” or something – American Eagle Energy announced that it would not make a $9.8 million interest payment on $175 million in bonds due that day. It will use its 30-day grace period to hash out its future with its creditors. And it hired two additional advisory firms.
One thing we know already: after years in the desert, restructuring advisors are licking their chops.
The company has $13.6 million in negative working capital, only $25.9 million in cash, and its $60 million revolving credit line has been maxed out.
But here is the thing: the company sold these bonds last August! And this was supposed to be its first interest payment.
That’s what a real credit bubble looks like. In the Fed’s environment of near-zero yield on reasonable investments, bond fund managers are roving the land chasing whatever yield they can discern. And they’re holding their nose while they pick up this stuff to jam it into bond funds that other folks have in their retirement portfolio.
Not even a single interest payment!
Borrowed money fueled the fracking boom. The old money has been drilled into the ground. The new money is starting to dry up. Fracked wells, due to their horrendous decline rates, produce most of their oil and gas over the first two years. And if prices are low during that time, producers will never recuperate their investment in those wells, even if prices shoot up afterwards. And they’ll never be able to pay off the debt from the cash flow of those wells. A chilling scenario that creditors were blind to before, but are now increasingly forced to contemplate.
When the heck will the bloodletting stop? Read The Fracking Bust Exacts its Pound of Flesh
Yedlin: Despite grim outlook for oilpatch, Encana follows Cenovus in raising equity by Debrah Yedlin, March 5, 2015, Calgary Herald
Hey, wait a minute.
Isn’t the oilpatch the poor cousin of the economy these days? The sector making headlines daily, whether over layoffs, capital spending cuts or where the price of oil closed?
Therefore, the fact Encana announced a $1.2-billion equity issue — a day after Cenovus’ $1.5-billion equity deal closed — caught many by surprise. It also happened to be on the same day Exxon said it raised $8 billion US in debt.
March 5, 2015: New Jersey Governor Christie gives “appalling and disturbing” gift to Exxon after liability determined in trial (in exchange for what?): Settles $8.9 Billion damages lawsuit for $250 Million ]
The Encana move follows from ARC Resources’ $407 million issue in January, U.S.-based Noble Energy tapping the equity markets for more than $1 billion last month.
It’s not because oil prices have staged a miraculous recovery. Far from it.
This week’s news that crude storage levels at Cushing, Okla., were at levels not seen in 80 years — and could be full by April — only fuelled the negative sentiment around oil prices and how much further they may drop as a result. It didn’t help, either, that U.S. storage levels rose by 10.3 million barrels — double what was expected — according to data released Wednesday by the U.S. Energy Information Administration.
Share issues of this magnitude, in these kinds of commodity price environments, are unprecedented.
It surely didn’t happen in the wake of other oil price collapses — in 1986, 1998 or 2008.
The question, then, is what makes now different than before?
Here are a few things to chew on:
The first is that the names that have raised money have seen the valuations in their shares, with perhaps the exception of Cenovus, hold up reasonably well, on a relative basis.
The second is that this is a way for energy companies to ‘de-risk’ their equity by paying down some debt and maintaining capital programs, even though they have already been downsized.
With respect to Cenovus, its decision was also motivated by the fact it had planned to monetize its royalty lands this year — much like Encana’s PrairieSky transaction — but given current market conditions was unlikely to get the price it would have wanted. No one wants to sell an asset at less than full value and the equity issue allowed the company to keep the royalty lands in its portfolio until market conditions improved.
The Encana deal likewise took many by surprise as it wasn’t expected or perceived to be necessary. Also puzzling was the fact the company is using the proceeds of the issue to retire some debt on its balance sheet ahead of schedule — by two or three years.
Typically, when companies do that there are penalty fees they have to pay to investors who planned to hold the notes to maturity, which can be material. They also have a credit facility drawn for about the same amount as what’s being raised. Presumably they could pay that down and then use it to repay those notes and avoid the penalty associated with the debt.
Still, the bigger question is why investors are interested in buying shares in energy companies in the first place, especially when the consensus now seems that there won’t be a rapid price recovery, and that a 12- to 18-month horizon seems more realistic.
One way to think about all this is that investors are looking at the longer-term horizon from an investment standpoint. Moreover, because the Cenovus and Encana share issues were done as so-called bought deals — where investment banks buy shares from the company and re-sell them to investors — they are typically done at a discount to the prevailing trading price; on slight markdown, if you will.
The other thing to consider, is that despite the energy sector being pummelled there is a bull market for equities happening in the broader market. In case anyone missed the hoopla, the NASDAQ blasted through the 5000 mark Monday, almost exactly 15 years after it reached that milestone the first time (March 10, 2000). Similarly, while the Dow Jones Industrial Average sold off Wednesday, both it and the S&P 500 also reached record levels Monday.
That means energy companies seen to be solid, long-term players can ride the coattails of the broader market and have the ability to raise money in the current market conditions.
And it’s not just equity, as evidenced by Exxon’s bond offering that was interpreted as a way to access cheap capital with its AAA credit rating (only one of three corporations in the U.S.) and park some of it for a potential acquisition.
This all gets back to some very basic business principles: managing businesses — physical assets, human and financial capital — prudently. Doing this right — both in the private and public sectors — allows for investments to be made through tough times such as what is currently being experienced today.
The payout comes when conditions do improve, and the company or jurisdiction is well- positioned to take advantage of new opportunities. [Emphasis added]
Oilsands junior Laricina defaults on Canada Pension Plan notes by Dan Healing, March 5, 2015, Calgary Herald
Laricina reports it is in violation of an agreement related to a
$150-million note issue.
Private junior oilsands developer Laricina Energy Ltd. warns it may not
be able to continue as a “going concern” after defaulting on terms of a
deal last winter to sell $150 million in notes to the Canada Pension
Plan Investment Board.
The cash-strapped company, which launched a strategic alternatives
process in November to look at options which could include a corporate
sale or merger, said in a news release on its website that its fourth
quarter 2014 thermal oilsands production of 1,255 barrels per day missed
its promised level by about 18 per cent.
… The $200-billion CPPIB is Laricina’s largest equity investor at 15.3 per cent thanks to a $250-million injection about four years ago.
Subsidiary CPPIB Credit Investments Inc. bought $150 million in 11.5 per
cent senior secured notes early in 2014. The notes, designed to provide
interim funding until the company could line up investment in a
commercial project, were to mature in March 2018.
The company said it had cash or equivalents of about $178 million as of Dec. 31.
It is seeking to raise at least an additional $350 million to allow it
to build its $520-million, 10,700-barrel-per-day Saleski commercial
project but said in the release it could report no results as yet from
its strategic process, led by advisers Morgan Stanley, BMO Capital
Markets and Peters & Co. [Emphasis added]