LACK OF ENERGY CAPITAL
Oil and gas companies are having a harder time getting capital, report states
It is getting tougher for oil and natural gas producers to access capital, a report issued Wednesday by Enverus states.
The on-demand software and data analytics company' s third-quarter 2019 capital markets review noted that Standard & Poor's E&P Index fell by 20% during the period, while the broader index was flat.
“That has eroded investor appetite for new issuances or initial public offerings, and equity capital raised at these prices may be viewed as dilutive for existing shareholders,” Andrew Dittmar, an analyst for Enverus, said.
The r eport i ndicates t he bond market has also become largely closed off to the industry, except for large issuers and those carrying an investment grade rating.
While bond issuances during the third quarter were up 114%, year-over-year, the report said that was driven by Occidental's $13 billion bond raise to support its Anadarko buy, plus offerings by midstream and utility companies.
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.
The report tracked $12 billion of total energy bonds maturing by the year' send, with about $3 billion of that issued by producers, also known as upstream companies.
“On the upstream side, a lack of access to capital for shale companies is becoming a defining story of 2019,” Dittmar said. “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.”
Investors, he continued, also will 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,” he said.
Dittmar said the analysis showed upstream companies continue to work at meeting free cash flow goals and holdi ng capital expenditures i n check as they focus on corporate efficiencies 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,” he said.
The report also notes that Chapter 11 bankruptcy filings are accelerating, and that 16 of 20 energy companies that took that step were upstream operations, including Oklahoma-based White Star Petroleum.
The report points out that White Star executives chose to sell assets during the bankruptcy reorganization in what is known as a 363 process.
“The majority of plans call for re struct ur in gs, with creditors taking control of the companies ,” D it tm ar said. “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.
“We could see additional liquidations if creditors decide they would rather get out what cash they can rather than own an E&P company.”
Env er us provides research and analysis of the oil and gas industry that includes minerals, l and, oil- field services, midstream companies and financial markets. Visit enverus.com to obtain a full copy of the report.