CrownRock this week
successfully rolled out an upsized unsecured bond deal as part of a
refinancing effort, illustrating that the capital markets are open for
select E&P credits despite the fall in oil prices. It was the first
E&P issuer to tap the market since mid-November.
On Tuesday, the oil-and-gas joint venture of
CrownQuest Operating and Lime Rock Partners placed a $350 million
offering of 7.75% senior notes due 2023 at 98.54, to yield 8%, which
represented the tight end of guidance on the back of strong investor
demand.
The successful execution of the B/Caa1 deal
was good news for energy companies of equal standing, indicating the
potential for more unsecured E&P issuance from these select,
high-quality issuers, sources indicated.
To be sure, CrownRock, which produces in the oil-rich Permian Basin, is one of the ‘haves’ in the energy sector. “CrownRock has good assets in the heart of one
of the best geographic plays with a solid management team. I think this
shows the new-issue market is open for select energy credits, but
investors will be picky,” said John Fekete, high-yield portfolio manager
at Los Angeles-based Crescent Capital.
The deal had also benefited from three
consecutive days of rising oil prices when it was placed Tuesday
afternoon. Whispers on the eight-year (non-call three) notes emerged
Monday in the 8.25% area with a one-point original issue discount, with
official price talk tightened to 8-8.25% as demand for the notes grew to
a 5x oversubscribed order book from 75 accounts, sources said.
Terms came at the tight end of talk, and it
was upsized by $50 million. Nevertheless, the paper rallied on the
break, with recent trades at 101.75, offering about 7.375%, trade data
show. The successful execution and strong
performance in the aftermarket resulted in a repricing of other high
quality Permian names, sources said. Within CrownRock’s capital
structure, the new issue even traded through the yield of the existing
bond. Post-break valuation was inside the 7.7% yield-to-worst quoted on
the issuer’s extant 7.125% notes due 2021 as of last week, trade data
show.
“Crown Rock had the right basin, with the
right cost structure and right hedging profile to come to market. Larger
energy companies with more diverse revenue streams and better capital
structures can also come to market, but they are probably holding off
until they can get more favorable rates,” said one buyside source.
Of course, concerns remain that oil could see
another steep decline, but since the start of the year, oil prices have
essentially held above $45, which market players suggest could be a
floor. “If feels like there is at least some stability, where you can
grade companies and see which ones are economical at that oil price,”
says one market source.
CrownRock is using proceeds from the offering
to repay its reserve-based revolver and for general corporate purposes.
“This senior notes offering will allow CrownRock to term out its
revolver borrowings, put cash on the balance sheet to fund 2015 capex,
and improve liquidity” said Moody’s analyst Arvinder Saluja.
The financing comes ahead of the spring
re-determination period, during which some companies will likely see
reductions in their borrowing bases due to the lower oil prices and a
slowdown of capital expenditures as they try to conserve cash. Investors
say that while there is some cushion from hedges for the first half of
the year, cuts may be even more severe in the fall.
That’s all the more reason for E&P
companies to find financing opportunities where they can. Indeed, aside
from CrownRock’s unsecured deal, there have been rumblings of E&P
issuance on the way in the form of second-lien secured “clubby”
offerings geared toward a small group of buyers, along with more private
equity-fueled transactions, which could look similar to GSO Capital
Partners’ alliance with Linn Energy. Meanwhile, an
increasing number of investment firms are setting up dedicated energy
funds to get in ahead of an anticipated recovery. “There is a lot of money circling energy.
While it is still very early days in terms of recovery, I think the days
of being short oil are behind us,” said Crescent Capital’s Fekete.
http://www.forbes.com/sites/spleverage/2015/01/26/hj-heinz-places-2b-bond-offering-to-repay-loan-debt/
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