Shale drillers are using cheap credit to retire their debt
Shale drillers — some of them just emerging from bankruptcy — racked up a staggering $42 billion in new debt in the first half of the year.
It’s not what you think. America’s oil explorers aren’t repeating the costly mistakes that landed them in hot water with investors, left them almost entirely shut out of debt markets and forced hundreds of them into insolvency over the course of five years. They’re holding the line on production, boosting investor returns and attracting the lowest bond yields they’ve ever seen. And instead of using their newly found cheap credit to boom again, they’re using it to retire costlier debt.
It’s true enough that borrowing costs have plunged across all industries as central banks inject liquidity into their economies. But arguably no sector has benefited from the bonanza of cheap debt more than shale, which about a year ago was on the brink of total collapse — facing a pandemic that sent fuel demand plunging and investors and creditors who, even before COVID-19, had grown weary of waiting for profits.
“We came into this year with too much debt, and we plan to pay debt down,” CEO John Christmann of shale explorer APA Corp. told analysts and investors recently. “The first priority has been the debt, and clearly we’re on a much faster pace there than we would have envisioned at the start of the year.”
It’s what investors want to hear, and it was repeatedly emphasized by other top producers such as EOG Resources Inc., Pioneer Natural Resources Co. and Continental Resources Inc. in the latest round of earnings calls.
Average yields on noninvestment grade energy bonds plunged to an all-time low of less than 5 percent last month, from almost 24 percent in March last year.
The shale patch has gone from 230 bonds trading at distressed levels in April last year to less than 15 today, according to Bloomberg Intelligence. The industry is also poised to generate more than $30 billion in cash this year, another record, thanks to a surge in crude prices.
As they push maturities back with newer bonds, energy companies face a much smaller wall of debt between now and the middle of next year, at less than $4 billion, said Spencer Cutter, an analyst at Bloomberg Intelligence.
The last time the shale patch had credit metrics this good, with debt roughly 2.5 times earnings, oil was selling for $100 a barrel in 2014. West Texas Intermediate is trading at about $66 a barrel.
Now energy bonds may be better positioned to weather the next bust. And that’s just where temptation may also lurk.
America’s second-largest drilling rig contractor, Patterson-UTI Energy of Houston, is boosting its own spending this year by 22 percent from earlier guidance based on conversations it’s having with customers for higher activity ahead. Normally, drilling contractors get a break in activity during the final three months of the year after customers blow drilling budgets and must wait for the new year before growing again.
“You can take fourth-quarter decline and throw it out the window this year,” CEO Andy Hendricks told analysts and investors July 29. “If you look at where commodity prices are trading — oil above $65 a barrel and natural gas above $3 — we’re not considering a fourth-quarter decline.”