Several exploration and production (E&P) companies in August accessed debt markets to refinance near-term maturities despite carrying higher-than-average debt loads. Antero Resources (AR), Range Resources (RRC), Southwestern Energy (SWN) and Occidental Petroleum (OXY) issued new bonds to repay debt coming due from 2021 to 2023 despite carrying one to three more turns of leverage than peers. Here, we define leverage as the ratio of a producer’s net debt to its earnings before interest, taxes, depreciation and amortization (EBITDA). If Producer A generates $1 billion in EBITDA annually and owes $2 billion in net debt, its leverage could be described as 2x; Producer A would be one turn more levered than Producer B with a leverage ratio of 1x.
The transactions send a positive signal to the E&P industry that even levered producers of size can access capital markets to refinance debt at reasonable rates, below 10% in our opinion. We believe higher commodity prices and the strength of broader high-yield market, the latter largely driven by unprecedented central bank stimulus, are responsible for helping E&Ps access debt capital markets amid these difficult industry conditions.
Figure 1 compares the average implied yield for a basket of E&P issuers to a broader high-yield index before and after the COVID-19 crisis. When E&P yields dropped below 10% in July, producers who needed financing were able to access markets at more reasonable levels than previous months, leading to a strong response from producers to tap debt markets.
FIGURE 1 | E&P Issuer Yields Relative to BofA US High Yield Index
Source | Enverus, FactSet, FRED Federal Reserve Bank of St. Louisoil
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