Exploration and production companies are bracing for a sustained period of low commodity prices by deleveraging through stock sales – and well-funded firms are surprisingly leading the way.
Ahead of the semi-annual redetermination of credit facilities, eight US explorers have been able to raise US$3bn so far this year through the sales, even though crude prices remain anemic.
And most are firms that are not facing the liquidity crunch that has hit much of the E&P sector, including investment-grade rated Noble Energy, which raised $1bn this week.
“The biggest correlation to industry valuations is financial leverage, not what basin they are operating in or how they are hedged,” said Robert Santangelo, co-head of Americas equity capital markets at Credit Suisse.
Investment-grade rated Noble (Baa2/BBB-) sold 21m shares overnight Wednesday via Goldman Sachs and JP Morgan at $47.50, in the upper half of the $46.50-$48.00 marketing range and relative to a $49.81 last sale.
The banks and Noble’s management discussed the financing confidentially with select institutional investors before more broadly marketing publicly, according to market sources.
Newfield Exploration (Ba1/BBB-) surfaced Thursday morning with a sale of 22m shares at $33.00, an increase from the 18m shares that had been marketed at $32.60-$33.70 via sole bookrunner Credit Suisse.
While not entirely guaranteed, there was an “element of certainty” associated with the funding that suggested some type of capital commitment on the part of CS, sources said.
“The capital markets have improved. The window is opening up for a lot of these companies,” said Gabriele Sorbara, E&P analyst at Topeka Capital Markets.
“You’ve seen companies enter the capital markets to fund their 2015 budgets, ensure they don’t trip their loan covenants should oil prices remain depressed, or just simply to shore up their balance sheets.”
Adding to the wave of recapitalizations, Concho Resources secured roughly $600m on a capital-committed stock sale after the market close Thursday.
Bank of America Merrill Lynch, sole books, is looking to off-load its purchase of 5.6m shares at $108.00-$109.50, versus a $112.97 last sale, with final pricing due Friday morning.
GOING ON OFFENSE?
The equity raises may not be entirely defensive.
Newfield, for example, is using the equity funding to fully repay the $610m it has drawn on a revolving credit facility, as it negotiates increasing the size of the facility from $1.4bn to $1.8bn.
The company also continues to “monitor conditions” in the debt capital markets to potentially redeem $700m principal of its 6.875% notes due 2020.
Newfield has slashed its capital budget for 2015 to $1.2bn, which is down sharply from $2.1bn last year and in line with the $1.3bn of Ebitda analysts are projecting it will generate this year.
Significant to living within the capital structure, it will devote 70% of this year’s budget to high-return assets in the Anadarko Basin.
“Our equity issuance will allow us to restore the full capacity on our revolver and ensure we have a strong financial position,” said Cindy Hassler, Newfield’s communications manager.
“We also wanted to make sure that we are able to hold by production (HBP) our STACK acreage in the Anadarko Basin in Oklahoma and be opportunistic around any potential bolt-on acquisitions that may come our way,” Hassler told IFR.
“STACK and SCOOP are a couple of great plays that deliver returns even in the current price environment.”
US production is likely to keep a cap on oil prices. Total US production averaged 9.2m barrels per day in January and is projected to grow to 9.5m in 2016, according to the US Energy Information Administration.
Crude prices meanwhile continue to struggle.
West Texas Intermediate, the US benchmark, took another downturn Thursday, falling $2.04 per barrel to $48.95.
While that was up from a low of $43.58 in late January, it is still below the $100-plus levels seen last autumn.
And the current 12-month STRIP – the average price of the next 12 months and the primary metric used in re-determining producer borrowing bases – trades at just $49.89.
While there is a lack of conviction about any near-term recovery, CS’s Santangelo and other market-watchers think better-funded companies such as Newfield have the ability to think a bit further down the road.
“Investors are taking a constructive view on mid-to-long-term oil prices,” Santangelo said.
“For well-capitalized companies, investors are looking through the low-point implied by the current STRIP, under the belief that unconventional US oil producers survive current low price environment and operate in a more realistic mid-cycle pricing.”
Noble Energy shares fell 5% to $47.32 Thursday, while Newfield Exploration fell 6.7% to $33.60.
“While a majority of stocks are pricing in north of $75 per barrel of oil, an improving oil price would quickly drive multiple contractions and NAV expansions for these companies,” said Topeka’s Sorbara.
“We continue to expect $75-plus per barrel of WTI crude oil to come back in the next 9-12 months, as we believe oil supply will come off the market.”