Saturday 6 June 2015

Oil and gas provides few discounts amid price drop

With oil producers doing more with less and an equity market pricing in a sharp recovery for crude, distressed debt investors are doing their best impersonations of shale geologists as they selectively develop their investment theses on an oilfield-specific basis.

Since OPEC ultimately decided against an output cut in November – a decision the 12-nation organization reaffirmed today - dozens of oil and gas credits immediately saw their debt become deeply distressed in the secondary market and bets were placed both for and against them by major funds that focus on distressed debt. However, the wave of restructurings in the sector, anticipated to be sizable following what is now about a 60% drop in prices from last summer, has so far only hit a small subset of servicers and already-troubled E&P concerns like Endeavour International and Quicksilver Resources. Most drillers acted fast in finding relief by slashing their spending, focusing on top tier plays, and successfully tapping the capital markets to meet near-term liquidity needs and push off debt maturities.
So far, investors have been eager to oblige to fund the slew of mostly second-lien bond issuances brought to market. SandRidge Energy, an oil and natural gas company focused the on Mid-continent region, is the latest example. The company in May raised $1.25 billion in new second lien notes, having upsized the deal by $250 million, to help pay off existing debt and add cash to its balance sheet.
And, while the market awaits the fall redetermination process, a potential trigger for drillers who may have their borrowing base cut by their banks, hedge fund analysts and restructuring advisors are combing through basin-by-basin break-even prices as a way model out valuations in a bond and equity market that generally feels overpriced.

Source: Data compiled by AlixPartners.

Oil and natural gas giant EOG Resources, for example, is looking at “strong double-digit growth” if oil prices recover and stabilize around $65 p/b going into next year, management said during its first quarter earnings. And, in the Delaware Basin and western Eagle Ford plays, EOG is realizing better returns at $65 p/b than it did in 2012 with $95 oil.
Far from distressed territory, EOG, one of the pioneers of horizontal drilling and fracking technologies, believes those operational benefits already at play in those areas, will unfold in their Wolf Camp and Bone Spring acreage. The incremental benefit of EOG’s cost reductions are that much more pronounced, considering the estimated break even costs for Wolf Camp and Bone Spring are $52 per barrel and $64 per barrel, respectively, according to a presentation by restructuring advisors AlixPartners.

Places like Wolf Camp, Bone Spring, the lower Sprayberry or the Midland basin were largely not part of a distressed debt investor’s vocabulary when WTI oil prices plummeted to the mid $40s in January, from more than $100 in July 2014, according to one investor. And, to highlight that no two shales are created equal, the break even estimates for shales range from the Marcellus in the Northeast at around $25 per barrel to the Eaglebine in eastern Texas at around $86 per barrel, according to the AlixPartners report.
And, for the more distressed names that are all but locked out of raising new money through bond issuances and equity raises, the location of their rigs throughout the country will prove a key consideration as those operators look to shed assets as a way to help boost liquidity.
Samson Resources – a $7.2 billion buyout in 2011 by KKR, the investment in which the private equity firm has written off to just 5 cents on the dollar – has hired restructuring advisors and in April disclosed in a SEC filing that it had to address its balance sheet within six months began marketing properties for divestiture during the second half of 2014. The oil and gas producer is hoping to shed non-core assets in the Williston, Wamsutter, San Juan and Arkoma basins, while holding onto its low-break even plays in the Eagle Ford, and to a lesser extent the Permian basin.
And, with those marketing processes ongoing — or likely picking up — the amount of available capital waiting in the wings indicates a healthy level of interest in new assets around the country. Major funds including Apollo Global Management, Oaktree Capital Management, GSO Capital Partners, have raised billion dollars of new capital to take advantage of the situation.
It’s now just a question of finding the right shale, and price.

http://www.forbes.com/sites/maxfrumes/2015/06/05/oil-and-gas-provides-few-discounts-amid-price-drop/2/?ss=energy