Austin, TX (October 30, 2019) – Enverus, the energy industry’s leading SaaS and data analytics company, has released its Q3 2019 Capital Markets Review which reports $40 billion raised via energy company debt offerings and $500 million in equity offerings. Bond issuances were actually up 198% from 2Q19 and 114% YOY, driven by Occidental’s $13 billion bond raise to support its Anadarko buy, plus offerings by midstream and utility companies. Meanwhile, equity raises were down 85% sequentially and 79% YOY.
“On the upstream side, a lack of access to capital for shale companies is becoming a defining story of 2019,” said Enverus Analyst, Andrew Dittmar. “Their stock has significantly underperformed the broader market with the S&P E&P Index (XOP) down nearly 20% in 3Q19 versus flat performance for the S&P 500. That has eroded investor appetite for new issuances or IPOs and equity capital raised at these prices may be viewed as dilutive for existing shareholders.”
The bond market has also become largely closed off except for large issuers and those carrying an investment grade rating. Those best positioned have kept debt in check and have longer-dated maturities on their bonds, giving time for the market to hopefully recover before they need to refinance. Enverus experts tracked $12 billion of total energy bonds maturing by YE19 with ~$3 billion of that from upstream companies.
With struggles in the equity and bond market, credit facilities look to be an important source of liquidity for some companies. Enverus analysts found $47 billion in facilities launched or amended in 3Q19 across 56 agreements with $15 billion of upstream facilities that are set to expire between 2019–2021.
“Upstream companies may be relying on credit facilities at an increasing rate just as banks take a more conservative outlook in their borrowing base redeterminations,” added Dittmar. “Investors will also be closely watching how drawdowns are spent. They want any use of this credit to be a short-term plug, not another way to delay getting to positive free cash flow while adding leverage to the balance sheet.”
“Companies are working hard towards hitting free cash flow goals and we expect more to reach the inflection point as CapEx is held in check and companies focus on corporate-level efficiency and full-cycle returns. Ultimately, that is likely to be what restores investor confidence in the sector and helps energy companies find some traction on stock prices. However, it may take some additional time and a tailwind from commodity prices wouldn’t hurt.”
Unfortunately, it is likely not all companies will be able to successfully transition to positive free cash flow from their current positioning, and with financing options sparse, Chapter 11 filings have also accelerated in the latest quarter. The number of bankruptcies filed in 3Q19 increased by 186% YOY, with a disclosed debt value of ~$15B. Upstream companies accounted for 16 of the 20 companies filing in 3Q19. Notable names entering restructuring include STACK-focused Alta Mesa, Eagle Ford-focused Sanchez Energy, and Permian-focused Halcon Resources.
“Companies have found themselves facing restructuring in a number of ways, but it usually boils down to overly aggressive CapEx to fund growth, wells substantially underperforming expectations, or some combination of the two,” added Dittmar. “However, companies are overall better prepared and more responsive to a changing market than past years, and we don’t expect to reach the level of filings from 2016, which peaked with around 40 upstream companies filing in 2Q16.”
“The majority of plans call for restructurings, with creditors taking control of the companies. White Star Petroleum (formerly one of the American Energy Partner companies) went the relatively rare route of selling its assets via a 363 process in bankruptcy. However, we could see additional liquidations if creditors decide they would rather get out what cash they can rather than own an E&P company.”
Outside of public markets, there is still some private capital being cautiously put to work. Enverus experts tracked 27 new management teams receiving commitments in 3Q19, including six upstream teams.
The largest disclosed upstream commitment went to WildFire Energy, with more than $1 billion committed from Warburg Pincus, Kayne Anderson, and its management team. WildFire is led by former WildHorse co-founder Anthony Bahr, while fellow WildHorse co-founder Jay Graham is leading KKR-sponsored Spur Energy Partners. Spur has been acting as a consolidator on the New Mexico Shelf, including a $925 million acquisition from Concho Resources. New upstream acquisitions by private capital have been focusing on buying assets with existing cash flow capable of organically funding development. Private money has also been deployed on midstream assets and select areas of the services sector that may be poised for further innovation and growth.
Full copies of the report are available upon request.
