Oil and gas record debt issuance to continue in 2013
NEW YORK, Dec 6 (IFR) - Oil and gas companies have issued record levels of debt in the US investment-grade and high-yield bond markets this year and are likely to do so again in 2013 as high oil prices prompt more exploration and development.
Shell International Finance, Russia's Rosneft and Chevron Corp raised a combined US$8.75bn in the investment-grade market last week, taking year-to-date oil and gas issuance in the high-grade senior unsecured market to US$84bn, according to Thomson Reuters data.
That's a 26% increase from 2011 and eclipses the record of US$77.6bn set in 2009, when plunging oil prices following the financial crisis forced oil and gas companies to raise debt to boost liquidity.
Sub-investment grade companies in the sector have also been on a debt spree, raising US$48bn in the junk bond market year-to-date. That compares with last year's US$33.4bn, a record at the time. The number of high-yield oil and gas companies accessing the market surged to 91 from 79.
"Major oil companies are funding a lot of new projects, with oil prices substantially higher this year, and those projects also make more sense with low interest rates," said a senior credit strategist at one of the major bond houses in the US.
Oil and gas companies are always among the most active issuers of bonds in the US, given their large capital expenditure needs. But this year capex was even more stretched, as they worked to address rising prices.
Oil and gas companies also joined the rest of the corporate world in racing to take advantage of low interest rates to term out debt, as well as to fund new projects made more economic by the lower funding costs.
In the past month alone, five of the six lowest 10-year coupons on energy company debt were recorded, by Chevron, Shell, BP, National Oilwell Varco and ConocoPhillips.
Brazil's Petrobras raised US$7bn in one hit and refiner Phillips66 raised US$5.8bn to capitalize itself after being spun off from ConocoPhillips.
Despite the deluge, energy spreads have tightened with everything else in the US bond markets. And though many single A and higher rated oil and gas companies are trading at extremely tight spreads, they are still attracting money flowing out of Treasuries and into corporate bonds.
"Some of these single A oil and gas companies are almost viewed as a Treasury substitute by insurance companies, who have to put their money to work," said James Lee, senior analyst at Calvert Investments.
"Conoco's recent deal was a blowout, even though it came at very tight spreads. But investors know Conoco has an operating history of more than 50 years, it's very liquid and it's not going out of business any time soon, so they will happily pile into its 10-year tranche at 80bp over."
As tight as spreads might be, some nuggets can still be found in the oil and gas bond sector, even among the highest-rated names.
David Schivell, energy credit analyst at Morningstar, named National Oilwell Varco as a pick.
The drilling rig service provider with a market capitalization of US$29bn issued US$3bn of five-, 10- and 30-year bonds in November, a deal that increased its leverage to 1.0x from 0.1x.
"Having only US$500m of bonds outstanding in the market, it was not a well known name to investors, so their new issue spreads came at what we thought were very wide levels for a high single-A credit," said Schivell. "Now their new bonds are trading 20bp tighter than new issue levels."
Heavy oil and gas issuance is expected in 2013, given the level of production commitments for projects over the next two to three years.
"Global exploration and production spending is set to reach a new record of US$644bn in 2013, up 7% from US$604bn in 2012," according to a Barclays report.
Barclays estimates that E&P spending will reach a record of US$460bn, up 9% from around US$421bn for 2012, which was itself up 11% from 2011 levels.
"Sustained high oil prices, the sanctioning of major projects and the delivery of a large number of offshore rigs in both 2012 and 2013 are driving the increases in spending," said Barclays analysts.
The wild card for deal volume is the extent to which natural gas companies - and even miners like Freeport McMoRan this week and BHP Billiton before it - look to diversify their sources of funding by going into the oil and gas business.
The most likely to seek bolt on E&P acquisitions are natural gas companies suffering from low prices. Having explored for natural gas reserves, taking on an oil and gas explorer and producer is usually a natural fit.
However, the backlash Freeport-McMoRan suffered this week, after announcing its US$9bn of E&P acquisitions, companies without at least some experience in the oil and gas field might think twice before diversifying into the sector.
Spreads on Freeport's 3.55% notes due March 2022 gapped out almost 30bp to 199bp on Wednesday, after news hit that it planned to buy Plains Exploration & Production Co and McMoRan Exploration Co for US$9bn of cash and stock, with investors expecting a large chunk of that to be raised via bond issues.
Its 2022s continued to widen out on Thursday, quoted this morning at 205bp from Wednesday's close of 200bp.
"People don't like the fact that Freeport is switching the business strategy," said Schivell. "The company seems to be using their balance sheet strength to make a play to diversify their business at a time when money is so cheap.
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