Wall Street doubles bet
Stock market’s investors are pouring more money into the oil industry, buying extra time for crude prices to recover
STOCK market investors are set to double the $10.5 billion they’ve poured into cash-strapped U.S. oil companies this year, becoming the industry’s go-to financial backer as traditional lenders retreat.
The extra cash from secondary stock offerings gives oil producers ammunition to survive the financial carnage in the oil market, and by helping the companies repair debt-laden balance sheets, they could likely afford to haul equipment back to Texas oil fields much faster once crude prices recover.
U.S. energy executives have said the nation’s beleaguered shale industry, running on financial fumes after the punishing combination of high debt and shrinking revenue, won’t be able to rebound as quickly as Saudi Arabia and its fellow oil cartel members fear. That’s because lenders and bond-market investors will be reluctant to reinvest in the industry, having burned their fingers on souring debt piled up during the years of $100 a barrel oil.
The industry’s new Wall Street financier “bridges that window,” Stephen Trauber, head of global energy invest- ment banking at Citigroup, said in an interview Tuesday.
“It’ll give companies that want to pay down debt the ability to do so,” Trauber said. “The first thing people are going to do with incremental cash flow is fix their balance sheets. They’ll increase their budgets a little bit next year, but not a lot.”
Eighteen domestic drillers, including five based in Houston, have sold new shares this year, and there’s no sign yet that the capital infusion has ended. On Monday, West Tex-
as driller Parsley Energy raised $390 million, and two pipeline companies, including Houston’s Spectra Energy, sold a combined $473 million in stock.
Last year, net debt — debt minus the capital they have to pay it off — for the 18 companies reached $41.1 billion, doubling since 2010 and three times what it was a decade ago. That debt is increasingly difficult to pay off after the collapse of crude prices. Fifty-six North American oil companies have filed for Chapter 11 bankruptcy protection since the downturn began, according to law firm Haynes & Boone.
But for battered drillers, capital markets “are more open than meets the eye,” said Rob Santangelo, an investment banker whose team at Credit Suisse has helped run at least half of this year’s oil company stock sales so far.
“It’s an optimistic note about how the industry has weathered what’s come at it so far,” Santangelo said, adding that the appetite among investors “is as strong now as it has been throughout the last year and a half.”
Crude prices touched a 12-year low in January and appeared to bottom out in February, creating the perfect conditions for oil companies to tap investors for capital, and pressing companies “to be more realistic and inward looking about what the right capitalization was,” Santangelo said.
Investors do well
Investors have done well, too. The 18 companies that have used secondary offerings have seen an average increase in their share prices of 28 percent.
In February, oil companies recorded the biggest one-month infusion of stock market capital in history. Santangelo believes companies could raise a total $15 billion to $20 billion this year. They raised $18 billion last year under similar circumstances.
After crude prices recover, bank debt will likely ease up for a period of time, especially from smaller lenders that have high levels of exposure to the energy industry. Banks are set to cut oil company credit lines by an average 15 percent to 20 percent this month during a semiannual debt review by lenders, said Doug Petno, CEO of commercial banking at JPMorgan Chase & Co.
“It’s being driven by a combination of oil prices being lower and less money being spent to drill new wells to replace the collateral that’s run off,” Petno said.
Revolving credit
The way it works is oil companies can borrow from a type of corporate loan called a revolving credit facility, which is guaranteed by the value of oil company property. Oil companies can borrow, repay and borrow from those loans again. Two times each year, banks reassess how much oil companies should be able to borrow from those credit lines, and when crude prices sink, the loans shrink, as well.
Still, Petno said, “there are some of the distressed guys that have fully drawn revolvers and are on the knife’s edge, but there are a lot of these guys can get prepared” for the review.
Part of that, for some companies, will be raising capital on the stock market. Once crude prices start recovering, capital markets will likely open wider, investment bankers and other experts said.
“Fundamentally, they’ll be drilling on cash internally generated and whatever they can raise in further equity issuances,” said Chris Ross, a finance professor at the University of Houston. “And private equity is sitting out there, ready to do some bottom fishing.”