Lowly rated US energy companies that struggled for survival last year are finding renewed optimism among investors after a surge in oil prices, helping them raise a record amount of debt to fend off bankruptcy.
Energy and power companies tracked by Refinitiv have raised more than $20bn in the high-yield bond market so far this year, an all-time record for data going back to 1996.
A four-month-long rally in crude prices stalled last week, but Brent, the international benchmark, remains above $60 a barrel, up over 60 per cent since the start of November. This rally, fuelled by vaccine rollouts and record Opec oil production cuts, has prompted a change in sentiment among debt investors who had shunned many energy companies last year.
“At these levels a lot of companies can hedge future production and survive,” said John Dixon, a high-yield bond trader at Dinosaur Financial Group. “It’s the oil-linked names in high yield that have been among the best performers recently.”
Last year’s oil crash — which briefly pulled US prices below zero — caused deep distress in the American energy business, where operators slashed planned spending, sacked tens of thousands of workers, and even shut down some wells.
Haynes and Boone, a law firm, said more than 100 US oil and gas producers and services companies went bankrupt last year, accounting for more than $108bn in debt.
Among them was Chesapeake Energy, a pioneer of the shale revolution, whose collapse symbolised the crisis for an industry that blew through around $400bn of external capital during a decade-long drilling boom that made the US the world’s biggest oil and gas producer.
At the start of February this year, Chesapeake raised two bonds to fund its emergence from bankruptcy, worth a combined $1bn, both with coupons under 6 per cent. It has been joined by higher rated Murphy Oil and Diamondback Energy, which have both issued debt in March.
Even lower-rated energy companies have been able to raise cash. CGG, which produces imaging software for use in oil exploration and carries one of the lowest ratings of triple-C plus, raised $500m last week at a coupon of 8.75 per cent. Similarly lowly rated Shelf Drilling, a rig provider to shallow-water drillers, raised $310m at a coupon of 8.875 per cent.
Renewed optimism has also helped drag the value of existing bonds back from the brink. Offshore drilling company Transocean’s seven-year bond raised last year has risen to 87 cents on the dollar from as low as 31 cents in October.
At its emergence from bankruptcy in February, Chesapeake joined other shale operators in saying a new era of slower production growth was under way and producers would now prioritise shareholder returns and debt repayment in a bid to prise open capital markets again.
Rystad Energy, a research company, said more than $170bn worth of shale company debt was scheduled to mature over the next five years, and another $90bn after.
Energy is the world’s indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here.
Some investors have urged caution, noting a longer-term shift towards more renewable energy sources.
“Traditional energy companies are trying to get through by greenwashing and telling people they are not that bad or that they are getting better,” said John McClain, a portfolio manager at Diamond Hill Capital management. “From our perspective it does not make sense to buy in until we see concrete change.”
In January, S&P Global Ratings cited an accelerating energy transition to clean fuels as it increased its oil and gas industry risk assessment to “moderately high” from intermediate.
“It makes sense that energy issuers would try to tap into a robust high yield market, especially given the revival in oil prices,” said Matt Eagan, a portfolio manager at Loomis Sayles. “I guess, hope springs eternal in the energy sector; however, ESG trends do not bode well for the sector longer term.”