Energy Sector Pays For Past Success
January 19, 2009
The bigger they are, the harder they fall, and few sectors were as big as energy in the high yield bond and leveraged loan markets. Even as other sectors were looked upon like lepers last year, companies like Atlas Energy and MarkWest Energy were pricing issues above par.
Today, energy companies find themselves in the same sorry boat as other issuers, paying beaucoup bucks to get anything priced. In December, El Paso Corp. priced $500 million in 12% notes due 2013 with an OID of 88.9, bringing the total yield to 15.25%. It was the first of only two issues to price last month, according to KDP Investment Advisors. A year and a half earlier, the company priced $1.275 billion in 7% notes and $375 million in 6.875% senior notes at par.
Unlike El Paso, which has approximately $1 billion in maturities due in 2009, most energy companies will not be forced to come to the capital markets this year, but they still face continued challenges in the form of short-term lending needs, depressed commodity prices and a sluggish M&A market. They also can't count on a government bailout in the name of green energy.
The good news is that those companies that find themselves attempting new issues will find demand for them. For example, the bonds El Paso issued in December were placed with a prearranged group of large buyers, freezing out other interested investors. The bad news is that demand will come with a very high coupon.
"El Paso can come back to market if they need to," said one portfolio manager. "But they're going to pay for it." He added that the company is likely to hold out as long as it can in the hopes of paying less later. A spokesman for El Paso declined to say when the company might return to the credit markets, but he said management will keep an eye out for opportunities.
The condition of the capital markets is the leading cause of concern among CFOs of energy companies in both the investment-grade and high yield markets, according to a recent survey by BDO Seidman. The survey found that 57% of energy company CFOs said constraints in access to capital is their number one concern. The second most pressing concern, number one for 21% of respondents, is falling commodity prices.
Andy DeVries, a credit analyst with Credit Sights, describes independent energy companies as having a barbell outlook. He points out that while the current economic climate is disastrous for energy companies, most of them will not have to refinance their debt for another couple of years. "After Enron crumbled in 2001, these guys went through a severe liquidity crisis. The crisis for this group was worse than the credit crisis we have now. These guys have been there, done that, and these guys were smart about it. They made sure their liquidity needs were met ...and they didn't have to come to the market."
Among the most challenged sectors in the energy field are oil and gas exploration and production (E&P) companies, such as El Paso. E&P companies have been reducing the capital spending that is a hallmark of their industry. E&P companies need to borrow significant amounts in order to continue their costly work, and if they don't continue to explore, their future revenues are in danger. Independent E&P companies have reduced their capital expenditure budgets an average of 34%, according to a Moody's Investors Service report published last month. For speculative-grade companies, those budget cuts go deeper. Berry Petroleum cut its capital expenditure budget by 77% and SandRidge Energy cut its cap ex budget by 75%. "We could see a number of companies faced with a liquidity squeeze," said Kenneth Austin, an analyst with Moody's. He said that lower-rated companies in the B to Caa/CCC range are the most likely to face such issues. Drilling companies are not as adversely affected, as their work is not as capital intensive as E&P, he said.
How Low Can Commodities Go?
Low commodity prices are a big part of energy companies' reversal of fortune. William Ferara, an analyst with Standard & Poor's, points out that natural gas prices earlier this month were half of what they were in June 2008 and oil dropped from $147 per barrel to less than $50 per barrel in that same period. Many energy companies, even if they do not traffic in oil or natural gas, often sell on markets where natural gas sets the price for energy, so the collapse of those prices have spoiled the energy outlook for everyone, according to DeVries.