October will mark the second bi-annual review of the credit lines for many heavily indebted shale players. Unfortunately their options are shrinking since oil prices now hover around $45 per barrel, significantly lower than the April 2015 mark of around $55 to $60 per barrel. While hedged positions staved off an a serious shortage of cash through 2015, and kept lenders from cutting credit lines, those positions are expiring and exposing companies to market prices. Here’s a chart of the debt status of several shale companies.
Describing this challenging backdrop was Emanuel Grillo, partner at Baker Bott’s bankruptcy and restructuring practice via Bloomberg Brief in July 2015: “People are coming to realize that the market is not likely to improve. At the end of September companies will know about their bank loan redeterminations and you’ll see a bunch of restructurings. And, as the last of the hedges start to burn off and you can’t buy them for $80 a barrel any longer, then you’re in a tough place. The bottom line is that if oil prices don’t increase, it could very well be that the next six to nine months will be worse than the last six months. Some had an ability to borrow, and you saw other people go out and restructure. But the options are going to become fewer and smaller the longer you wait.”Viewing this dilemma from the banker’s perspective, Mr. Grillo stated: “They know what pressure they’re facing from a regulatory perspective. At the same time, if they push too far in that direction, toward complying with the regulatory side and getting out, then they’re going to hurt themselves in terms of what their own recovery is going to be. All of the banks have these loans under tight scrutiny right now. They’d all get out tomorrow if they could. That’s the sense they’re giving off to the marketplace, because the numbers are just not supporting what they need to have from a regulatory perspective.”
Companies with midstream assets to sell should have more restructuring possibilities since they have a fairly robust market of potential master limited partnership (MLP) buyers to offer assets. Coupled with non-essential production and acreage position asset sales along with budget cuts survivorship probabilities should be enhanced. Larger sales that may fall into this category are Pioneer-Reliance sale of EFS Midstream for $2.15 billion, Encana’s sale of Haynesville assets for $850 million and Continental’s sale of Hiland Partner’s Bakken pipes for $3 billion.
Options for smaller players are unfortunately much more limited as witnessed by the 2Q additions to Moody’s “probability of default rating” or PDF. Joining that listing were American Energy Woodford, Magnum Hunter Resources, Quicksilver (Bankruptcy 3/16/2015), Sabine Oil & Gas (Bankruptcy 7/14/2015), and Warren Resources.
On a macro basis, Standard and Poor’s Ratings Service in a report this month stated, the oil and gas sector has nearly $242 billion in rated debt scheduled to mature from the second half of this year through 2020. Of the debt scheduled to mature, $124 billion is speculative grade. Companies carrying speculative debt “show weaker credit metrics than those rated investment grade and so, often are subject to a greater degree of refinancing risk, especially when investors become more risk averse and volatility rises or liquidity declines.”
A quote at a recent Barclay’s Capital Energy Conference attributed to Freeport-McMoRan Inc.’s Jim Flores may have summed it up the best, “It’s raining and it’s going to rain for a long time. We’re all going to get wet. A few people are going to drown.”
Natural Gas Intelligence
E & P’s Bracing for Redetermination Redux
Shale Drillers’ Safety Net Vanishing
What do you think? Leave a comment below.
Latest posts by Bob Black (see all)
- Redeterminations, Hedges and Oil & Gas Q415 Outlook - October 1, 2015
- Natural Gas Exports to Mexico on the Fast Track - August 11, 2015
- Gulf Coast LNG is Ready for the World - July 14, 2015