April 12, 2012 / 7:45 PM / in 6 years

Energy companies turn to high-yield market to fund shift to oil

April 12 (IFR) - Energy and pipeline companies have poured into the high-yield market in 2012, taking advantage of attractive rates as they shift their capital to oil and away from natural gas.

A total of $22.7 billion in new energy and pipeline paper has come to market year to date, according to Barclays, 85% more than this time last year. This represents almost a quarter of the total high-yield issuance year to date, whereas the sector represents 12% of the index market value.

Issuers this year in the sector are largely using existing capex and money raised in bond offerings to fund acquisitions of new oil assets as natural gas prices hit a decade low.

“If companies have the ability to, they are spending the majority of capex on oil properties. Some can’t, but if you have a choice you are absolutely spending on oil and not natural gas (with gas prices below $2/mmbtu),” said Gary Stromberg, managing director and co-head of US high-yield research at Barclays.

Unfortunately, this surplus of new issuance from the sector, along with natural gas price declines, has weighed on energy sector spreads this year. Energy bonds have underperformed year to date with the Barclays high-yield energy index returning 2.6% year to date, well below the overall markets’ return of 5.3%, respectively.

Natural gas-weighted E&P bonds returned a negative 0.4% on average, year to date, according to Barclays, and the E&P index has widened 100bp versus the high-yield market.

The ‘oily’ names have done well in the current environment. “Rising oil prices have helped the sector,” said Stromberg. “The oily names have had better execution and tighter spreads typically, and have hung in pretty well even in the sell-off.”

Some of the more oil-rich names to tap the market in 2012 have included Continental Resources, Berry Petroleum , PetroBakken and Concho Resources.

The Continental Resources deal, rated Ba2/BB+, is a good example of how tight spreads had gotten for certain attractive credits. Its $800 million 10.5-year non-call five senior unsecured notes, priced in early March, came with a low 5% coupon at par. Those notes are currently trading at around 100-101.

In the secondary market, Barclays recommends an overweight on exploration and production names like Hilcorp Energy, MEG Energy and Plains E&P, all of which have more operating leverage to oil.

Investors say some names also have an added takeover premium, making them particularly attractive. “There is intense speculation of takeovers in this space and a huge takeover premium in certain names,” said one portfolio manager. Continental Resources, Kodiak Oil & Gas and Antero Resources are possible targets he said.

“We have a stable environment in the US and Canada, no political risk, and oil prices are high — which makes these assets attractive. They would make a nice accessory to a big oil player,” said the investor.

Last year, Anglo-Australian BHP Billiton bought Petrohawk Energy Corporation while Norway’s Statoil purchased Brigham Exploration for $4.4 billion in cash in October to gain US oil assets. Also last year, China’s top offshore oil producer CNOOC Ltd bought Opti Canada out of bankruptcy as it beefed up Chinese investment in Canadian oil sands.

In the primary market, the latest sector name to tap the high-yield market was EP Energy, which Tuesday priced a large $2.75 billion offering as part of its buyout by Apollo, Riverstone, and Access Industries, and other investors for approximately $7.15 billion. El Paso Corporation was required to spin off EP Energy, its oil and gas exploration and production business, as part of its upcoming $21 billion acquisition by Kinder Morgan.

The EP Energy bond deal priced on the tight side of talk, and was well oversubscribed. It included a $750 million seven-year non-call three senior secured tranche (rated Ba3/BB-) that priced at 6.875% at par and another $2 billion eight-year non-call four senior unsecured tranche (rated B2/B) priced at 9.375% at par. Citigroup, JP Morgan, Credit Suisse, Deutsche Bank, BMO, RBC, UBS, Nomura were joint bookrunners on the deal.

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