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
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
"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
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
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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