Energy Companies Face Looming Debt Burden -- Update
February 19 2020 - 5:09PM
Dow Jones News
By Julia-Ambra Verlaine
U.S. oil-and-gas companies need cash, but it won't come at a
cheap price.
Explorers and producers have more than $85 billion of debt
maturing over the next four years. Those with junk-rated debt will
likely have a hard time tapping capital markets in 2020, increasing
the odds for wave of defaults, according to a new report by Moody's
Investors Service.
"Despite our expectation of a generally low interest rate
environment globally, such companies face greater risk because of
continuing overproduction, depressed natural gas prices and
widespread investor risk aversion toward the exploration and
production sector," said Moody's analyst Sajjad Alam.
The yield on the benchmark 10-year U.S. Treasury note traded at
1.569% Wednesday, according to Tradeweb, versus 1.909% at the end
of 2019.
A rally in riskier corporate bonds in January helped some energy
companies with lower credit ratings issue new bonds and push back
looming repayment dates.
But investors made it clear that terms wouldn't be generous for
everyone. For example, natural-gas producer Range Resources Corp.
paid 9.25% to borrow $550 million of bonds due in 2026, while
oil-focused WPX Energy Inc. paid 4.50% to borrow $900 million of
unsecured notes due in 2030, according to S&P Global Market
Intelligence.
The difference in pricing underscores how investors have become
increasingly selective in a sector where they lost considerable
amounts of money through bankruptcies and distressed exchanges in
the aftermath of the crash in oil prices in 2015.
"As you come out of each cycle in this industry, investors
emerge increasingly aware of the risks and are more able to
anticipate them," said Nick Fall, a managing director on the
leveraged finance syndicate team at Barclays. "It remains a credit
picker's market -- with overlay of hunt for yield. The recent
volatility in commodity prices has further underscored this since
the wave of activity in early January."
Junk-rated North American companies hold more than 62% of total
exploration and production debt coming due over the next four
years, with a majority due in 2022. Debt investors studying the
refinancing prospects of these companies have already begun pushing
their debt prices to distressed levels, according to Moody's.
The fortunes of exploration and production companies depend on
oil and gas prices, which determine the value of their reserves and
how much money they are able to borrow.
U.S. natural-gas producers face the highest hurdle, according to
Moody's. Antero Resources Corp. and EQT Corp. have the largest
looming debt maturities by 2024, with $2.6 billion and $2.5 billion
due, respectively.
Investors and traders say refinancing costs will remain
especially high for natural-gas producers without a sharp rebound
in gas prices.
Natural-gas futures are trading below $2 per million British
thermal units, highlighting how a persistent glut has buffeted
energy investors and producers. This winter's mild weather has
joined an oversupply of the commodity to push natural-gas prices
down.
Analysts also say the boom in investing using environmental,
social and governance criteria may be the nail in the coffin for
deeply indebted energy companies.
"Some European banks and institutions are limiting their
exposure to the industry due to ESG concerns, further reducing the
investor base," said S&P analyst Paul Harvey. "Adding to the
mix is continued oil price volatility and very low natural gas
prices."
Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com
(END) Dow Jones Newswires
February 19, 2020 16:54 ET (21:54 GMT)
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