2015-12-08 19:50:00
OIL & GAS SALES
A fresh wave of selling hit energy-company bonds, reflecting a growing consensus that slumping commodity prices will push many heavily indebted firms into default.
Bonds from Chesapeake Energy Corp., which is looking to restructure some of its debt through an exchange offer, traded at 32.8 cents, a decline of 17%, according to data from MarketAxess Holdings Inc. Oasis Petroleum Inc. bonds shed roughly 6% and traded at 79 cents. A bond from EP Energy LLC traded at 80 cents, down about 5%.
The selloff marks a sharp shift in Wall Street sentiment from earlier in the year, when investors piled into energy-company debt and firms sold new bonds as the price of oil appeared to stage a comeback.
But with oil prices plunging anew after the Organization of the Petroleum Exporting Countries decided Friday to keep pumping crude at near-record levels, many firms' bonds have begun trading at levels that suggest a reckoning is at hand. Crude fell $2.32, or 5.8%, to $37.65 a barrel on the New York Mercantile Exchange.
Maintaining the ability to borrow money at reasonable terms is crucial to many low-rated energy firms, which need to raise cash to retire debt and pay for new infrastructure. Analysts say losing access to the capital markets could accelerate some firms' slide into bankruptcy, though a wave of defaults wouldn't necessarily provide immediate relief for the industry's supply glut.
Nymex crude futures falling below $40 again "was sort of a psychological barrier," said Jody Lurie, corporate credit analyst at Janney Montgomery Scott. "It's causing a certain element of panic, particularly as you see more and more companies indicating that they're operating in a challenging environment."
Also falling were bonds from companies that own and operate pipelines, such as Plains All American Pipeline LP and Energy Transfer Equity LP, indicating some uncertainty over whether stressed energy producers will continue pumping. Energy Transfer bonds fell 2.5% and bonds from Plains All American, which has an investment-grade rating, was down 0.8%.
The losses come after many bonds were already down 60% or more on the year, creating a difficult environment in recent months for energy companies to sell debt needed to shore up their operations. American Energy-Permian Basin LLC, an affiliate of American Energy Partners LP, took about a month to finalize a $530 million bond sale in November that carried an elevated 13% yield and had to be reduced by $30 million, according to S&P Capital IQ LCD.
Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments, said his firm expects roughly half of low-rated energy producers to default over the next two years. He said the ability of these companies to generate cash is "really in question potentially for many years, not just many months as we would have said at the beginning of the year."
Mr. Tannuzzo said his firm has an underweight position in junk-rated energy producers but sees opportunities in the broader energy space. He favors investment-grade firms such as pipeline operator Kinder Morgan Inc. The company Friday said it would review its dividend policy to potentially shore up cash, which is considered a bondholder-friendly move. The announcement sent the stock sliding but some Kinder Morgan bonds were up slightly, one of the few fixed-income winners in the energy sector Monday.
Marathon Petroleum Corp., which has investment-grade ratings, moved forward with a $1.5 billion bond sale, showing that some investors still had an appetite for energy names. The company raised yields on some of the bonds amid the oil slump on Monday.
In the stock market, where energy shares slid, many of the worst losses hit companies with the highest debt loads.
Natural-gas pipeline company Williams Cos. is among the most highly levered energy firms in the S&P 500, as measured by its ratio of debt to earnings before interest, taxes, depreciation and amortization. The metric stands at 7.8, according to FactSet. Its shares fell 13%. The average S&P 500 company has a debt/Ebitda ratio of 3.5.
Shares of Consol Energy Inc., which has a debt/Ebitda ratio of 5.8, lost 15%. Shares of Oneok Inc., which has a debt/Ebitda ratio of 5.6, fell 13%.
"They probably all have serious balance sheet risks," Tyler Rosenlicht, portfolio manager at Cohen & Steers Inc., said of Monday's biggest losers. "These are the lowest quality."
Brian Aiello, a spokesman for Consol, said the firm has a cash-flow plan based on conservative commodity prices and is looking to sell certain assets to help reduce debt. He said the company is "well prepared to continue to weather the current environment."
Representatives for the other firms either had no comment or didn't respond to requests for comment.
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