Spring Debt Check The Bellwether That Squeezes Oil, Gas Companies?

Nevertheless, Morris said, there are still plenty of healthy companies in the energy space.

“Several of the companies that we represent have credit agreements, but they don’t have anything drawn on them. Really, the credit agreement is there because the rating agencies want it to be there to maintain so that there’s liquidity and so the ratings agencies will maintain the ratings on their public debt. But there’s still a lot of healthy companies, and I would expect them to continue to be healthy unless oil prices fall much further,” Morris said. “Having said that, there are a lot of companies that aren’t particularly profitable at these prices and that are in a holding pattern and doing everything they can to ride it out until prices come back up. And if prices stay low, or go much further down, we’ll continue to see the marginal companies experience difficulty and ultimately have to restructure their debt and/or go through bankruptcy.”

Ringing the Bellwether

Each determination represents some risk, at least when commodities prices are low,” York said.

“The typical view has been that each time you re-determine, as long as prices stay low, it gets harder and harder to re-approve someone’s debt. The chances of the redetermination being adverse to companies’ financial viability increases as oil stays lower. People were already watching, and are saying the March 2016 redetermination could be the bellwether that the transactions space is looking for,” he said, adding that specter might stimulate a lot of transaction activity.

“This works in that direction because oil prices are now hovering around $40, rather than the $45 they were hovering around in October, and so that’s going to put more pressure on those redeterminations and that might start to loosen up the transactions space, and you might have some guys who don’t want to sell, but they’re going to be more compelled to sell in a $40 world than in a $45 world,” he said.

Boguslaski said he anticipates business reorganizations, sell-offs and even bankruptcy on across the industry.

“For the E&Ps, I think it will be internal balance sheet restructuring, I think the bankruptcy process will be used selectively, especially when you have public companies or public debt. But I think you’ll see a continuation, for the most part, toward the trend of prepackaged bankruptcies where the company will have worked out a basic deal with the lender before they go into that process and that process can be run relatively quickly,” he said.

Service companies are among the first to get squeezed during a downturn and one of the last sectors to bounce back.

Given all of the cutbacks – the hundreds of thousands of layoffs, the billions of dollars in mothballed projects – why are these companies still seeking out capital?

As Boguslaski explained, “They’ve cut their budgets, but they’re still spending money. It’s all the activities they have to do to produce oil. They do have fairly sizeable operations that require capital. In addition, a lot of these companies are highly levered, they do have a lot of bond debt, and that bond debt still has current interest payments that have to be made.

Many companies have endured liquidity enhancement strategies, like cutting CAPEX and reducing layoffs, even blending the two, he said.

Morris added, “I think you’ll still some borrowing for drilling to keep leases in place and to replace reserves. I also think you’ll see some of the strong acquiring the weak and borrowing to do that.”

What’s more, the majors have enough cash that they’re not going to suffer, he said. It’s even possible that at some price level, the stock of a major becomes low enough that Exxon decides to acquire them. That’s the type of deal that went down in the 1980s, when Chevron acquired Texaco, and Exxon acquired Mobil, he said.

“But in the 1980s, you really didn’t have hedging, and today you do,” he said. “So instead of driving a car off a cliff when oil prices fell dramatically, you [can be] skiing down a slope.”

Depending on how well a company had hedged its bets, they could be skimming the bunny slopes, swishing through a black diamond trail or careening down a double black diamond.


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