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