A Slow Squeeze on Indebted Oil Firms Has CFOs Looking to October
Mid-Con Energy Partners LP Chief Financial Officer Mike Peterson is trying to avoid the slow squeeze that’s snared many of his peers in the U.S. oil industry.
Banks last month cut the amount that the Texas producer can borrow on its credit line by 8 percent to $220 million, leaving it with just a $17 million cushion. With oil still down 45 percent from last June’s peak, it’s looking to acquire assets or raise money to avoid another cut later this year. The financing isn’t cheap, with Peterson seeing most investors looking for a 10 percent to 12 percent return.
A wave of credit-line reductions the past two months has left producers scrambling to raise cash to keep drilling, or in some cases, to pay down overdrawn loans. For producers that survived that test, the clock is ticking on more reductions when banks recalculate borrowing bases -- which are tied to the value of oil -- again in October.
“Everyone should be thinking of what happens in the fall,” Peterson said in a telephone interview. “If it’s our choice, we’re going to pursue something with a drilling partner or a preferred equity investment.”
He estimates the oil industry faces potential credit line cuts of 10 percent to 20 percent in October. That means the rush to raise money is set to continue after oil and gas producers issued about $5.3 billion of high-yielding debt this year to pay off their shrinking credit lines.
The slump has already tipped some firms into bankruptcy. The latest, Colorado shale producer American Eagle Energy Corp., filed for Chapter 11 protection on May 8 in Denver with $215.2 million of debt, most of which it hadn’t even made an interest payment on since issuing it in August.
Sabine Oil & Gas Corp. is negotiating with lenders who demanded payments starting at the end of this month after a 25 percent reduction to its credit line left it overdrawn. Houston-based Sabine, backed by energy-focused private-equity firm First Reserve saidin March that there was “substantial doubt” about its ability to continue as a going concern.
Michael Magilton, Sabine’s CFO, didn’t immediately respond to telephone calls seeking comment, and Meredith Mitchell, a spokeswoman for First Reserve who works at Prosek Partners, declined to comment.
“If your borrowing base is re-determined where banks want to be paid back and you can’t do it, it’s pretty much lights out,” Brian Gibbons, a senior analyst for oil and gas at CreditSights Inc. in New York, said in a phone interview.
Benefits reaped from commodities hedges will start expiring later this year, leaving producers more exposed, he said.
Oil companies that binged on $120 billion of junk-rated bonds to fund the U.S. shale boom during the past three are struggling under the weight of those obligations. Many are getting a second chance in the form of costly secured debt that has yielded as much as 12 percent. Companies have issued about $5.3 billion of secured obligations during the past five months, according to Bloomberg Intelligence analysts Spencer Cutter and Yuanliang Huang.
“Absent $75-plus oil prices over the next two years, we’re looking at a multiyear restructuring wave,” said Gibbons.
W&T Offshore Inc. this month got a $300 million second-lien loan with a 9 percent fixed rate to help pay down credit line that was cut by 20 percent to $600 million. Tracy Krohn, the firm’s race-car driving founder and chief executive officer, committed to buy $5 million of the loan, according to a May 5 statement. The company said its borrowing base would be reduced further to $500 million after the loan was completed.
High debt loads are prompting some firms to scale back spending. A unit of American Energy Partners LP, formed by former Chesapeake Energy Corp. CEO Aubrey McClendon, lowered its 2015 capital budget to $450 million from about $1 billion while production is expected to drop to an average 20,000 to 24,000 barrels of oil equivalent per day from 26,000 to 30,000, S&P said last week.
Standard & Poor’s lowered the ratings of the firm’s Permian Basin LLC unit last week to six levels below investment-grade, warning that its debt relative to earnings might become “unsustainable.”
“They don’t want to burn through all their liquidity, so they’re reining in their capital spending,” Carin Dehne-Kiley, an analyst at the credit ratings firm said in a telephone interview. “They loaded up on debt assuming all this growth was going to come this year. It’s not coming.”
The company’s borrowing base was reduced by 23 percent to $500 million in April and it’s facing a potential shortfall in cash flow next year, Dehne-Kiley said.
Charlie Rexford, a spokesman for American Energy at Brunswick Group, declined to comment.
For Mid-Con, an acquisition of $40 million to $50 million of assets would boost earnings by enough to head off any further reduction to its borrowing base, CFO Peterson said.
The producer’s only borrowings are from its credit line, and it has enough cash from operations for its spending budget and shareholder distributions, according to Peterson. He said the producer aims to finance the acquisition of oil properties with equity.