Shale Bond Buyers Get Picky
(Bloomberg) -- After years pouring funds into the shale boom, bond buyers are getting increasingly selective as defaults rise and many explorers continue to burn more cash than they make.
While Exxon Mobil Corp. and Occidental Petroleum Corp. have recently sold a combined $20 billion of investment-grade debt, junk rated issuers are getting a far different market reception.
High-yield energy companies have sold about half as much corporate debt this year as they had at the same time in 2018, according to data compiled by Bloomberg. Issuance in the broader junk bond market, by contrast, was up about 30%.
“We haven’t seen new energy deals getting done in the first seven months of the year for anything rated lower than B,” Eric Rosenthal, senior director for leveraged finance at Fitch Ratings, said in a telephone interview.
Wary investors are more than ever pushing shale explorers to shift from the growth-focused novelty they once were to better-managed, cash-generating businesses. While they’re sitting on a wealth of crude in regions like the Permian Basin of West Texas and New Mexico, constantly tapping those resources with high-tech rigs and fracking technology can be a money drain that some have handled poorly.
And while oil has more than doubled from the 2016 low, trading has been erratic. Earlier this month one oil benchmark suffered the steepest one-day drop since February 2015, as the escalating trade war between the U.S. and China roiled financial markets. Falling crude prices hurt revenue and make it difficult for companies to continue spending as much money on projects.
“Ultimately, investors are also becoming a little more disciplined, if you will, and part of it may be just because of volatility on the commodity side,” said Mark Freeman, Founder and Chief Investment Officer at Socorro Asset Management LP.
On Monday, West Texas Intermediate oil futures were trading around $55 a barrel.
The energy sector, which makes up the biggest chunk of the U.S. high yield bond market, has been the laggard this year in the Bloomberg Barclays high-yield index as defaults ratcheted higher.
Default Warnings
At current levels for crude, some companies are struggling to pay creditors. Recent Chapter 11 filings from Sanchez Energy Corp. and Halcon Resources Corp. have taken the U.S. high-yield energy default rate to 5.7% from 4.1% at the end of July, according to Fitch.
Sanchez cited “the prolonged and continuing period of commodity price decline and volatility now lasting nearly a half a decade, and the resultant and related financial difficulties associated with managing high levels of debt under such market dynamics,” as contributing to its bankruptcy, according to court documents.
Junk bond default rates in the energy sector are likely to rise toward 10%, UBS strategists led by Matthew Mish wrote in a recent note. While dovishness from the Federal Reserve has driven a drop in interest rates, that hasn’t been enough to offset widening credit spreads for the debt of risky companies.
Natural gas prices have fallen as well, hurting major players in the Marcellus and Utica basins, Bernstein analysts led by Jean Ann Salisbury wrote in a note last week.
The movement in Chesapeake Energy Corp. and Southwestern Energy Co.’s credit default swaps, or the cost to protect the company’s debt against default, suggests the risk of insolvency over the next 5 years has doubled from about 5% to 10%, the analysts said.
12
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- ExxonMobil Racks Up Discoveries in Guyana Block Eyed by Chevron
- Oil Market Sentiment Has Improved Significantly
- EU, US Eye Collaboration on Nuclear Materials
- USA Driving Activity to Increase to All-Time Highs
- TC Energy to Sell Prince Rupert Gas Pipeline Project to First Nation
- EU Electricity Export to Ukraine Up 94 Percent in Two Years
- China Coal Output Falls for First Time since Government Ordered More
- BP Pulse Buys One of Europe's Largest Truck Stops
- UK CCUS Plans Outdated: Think Tank
- North America Enters Rig Loss Streak
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- Rystad Looks at the Buzz Around White Hydrogen
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension