(Corrects portfolio manager’s name in 8th paragraph)
By Yun Li
NEW YORK, May 31 (LPC) - The rise in oil prices has come at an opportune time for oil and gas borrowers, which are facing US$400bn of maturing debt over the next 18 months and are preparing to engage in refinancing talks with lenders.
There is approximately US$833.3bn of loans outstanding in the oil and gas sector, with about US$399.5bn scheduled to mature by the end of 2019 and US$138.4bn by the end of 2018, according to Thomson Reuters LPC data. As higher oil prices boost the credit quality of oil companies, issuers are likely to get more favorable terms when they negotiate refinancing terms.
“There’s an awful lot of debt maturing by 2019 and 2020,” said Thomas Watters, managing director in the oil and gas ratings group at S&P Global. “Back between the years of 2012 and 2014, there was an irrational exuberance going on where oil prices were high and interest rates were low and there were a lot of deals getting done. A lot of high-yield credits came out first-time financing and they issued five- to seven-year papers. Higher oil prices will no doubt help them refinance.”
The thriving oil market is supporting a steady recovery in the US oil and gas loans as the secondary prices have slowly climbed to a three-year high. The average bid of oil and gas loans has climbed 135bp so far this year to 97.33 in tandem with higher oil prices. About 80% of oil and gas loans are bid above 90 cents of the dollar, compared to 72% at the end of 2017 and only 32% in June 2016.
There are signs that borrowers from the energy sector are already enjoying strong investor demand. Oilfield services firm Keane Group successfully cut pricing on its US$350m seven-year term loan in May and the loan broke above par in the secondary market and was quoted at 100.125-100.5 on Wednesday.
Natural gas and crude oil midstream company Brazos Midstream launched a US$950m loan backing its acquisition by Morgan Stanley Infrastructure Partners in early May. The loan pays lenders 400bp over Libor with a 0% floor. It opened in the secondary market above the issue price of 99.5 and was quoted at 99.75-100.375 on Wednesday.
The expected growth in oil production and the improving cash flow for oil producers will further support loan prices in the secondary markets. Oil and natural gas production will increase by about 10% in 2018, while Ebitda for the exploration and production sector will grow by 18% to 22%, according to Amol Joshi, Moody’s vice president of oil and gas.
“Exploration and production companies have become more cost efficient coming out of the 2016 downturn, resulting in improved profitability as prices rise,” said Matt Kennedy, senior portfolio manager of Angel Oak Capital Advisors.
Oil and gas loan prices have rebounded to the 97 area from the lows of 75 in 2016 when a plunge in crude left oil and gas assets reeling. But they have more room to run as the issuer base is largely made up of oilfield service providers, which normally recover slower than upstream oil and gas producers.
“When prices fall, there’s no need for oil companies to spend capex to drill new oil so the service sector gets hit the hardest and when it recovers, it recovers the latest,” said John Yovanovic, head of high yield portfolio management at PineBridge Investments.
Brent, the international benchmark for oil prices, surprised the market when it hit a four-year high above US$80 per barrel on May 17 after the US pulled out of the Iran deal. Prices since have retreated to the US$70 area recently on Saudi Arabia and Russia’s plan to pump more crude to compensate for a potential supply shortfall. The stabilization of oil prices is no doubt credit positive for the energy sector.
“Frankly, the credit market ought to be thrilled with any WTI price above US$60 per barrel,” Yovanovic said. “What the market should really be focused on is increased default risk if oil prices fall below US$45 to US$50, not day to day swings at current prices. I believe that WTI is not going sub-US$60 any time in the near future.” (Reporting by Yun Li Editing by Michelle Sierra and Chris Mangham)