Energy’s drunken-sailor legacy hits plan for debt rescues

Bloomberg

Debt-laden energy companies that still don’t have a financial escape plan in place are running out of time and willing lenders even after oil doubled from its February lows.
Crude prices topping $50 a barrel helped to ease pressure on distressed energy companies, allowing at least 27 issuers to sell $16 billion of
junk-rated bonds in last year’s final quarter, according to data compiled by Bloomberg. That still leaves about $44.5 billion maturing by the end of 2020, according to Fitch Ratings. A “mountain” of more than $18 billion in credit-line commitments comes due in 2019, said Spencer Cutter at Bloomberg Intelligence.
Those still vying for new capital such as Vanguard Natural Resources LLC and Pacific Drilling SA need prices above $55 to $60 to win over lenders, according to credit analysts. What’s more, banks face tougher limits from U.S. regulators on energy loans, spurred memories of previous of booms and busts.
Creditors remain mindful that drillers “get very happy about their cash flow” during good times, Evercore ISI analyst James West said. “And when financial markets become wide open, they spend like drunken sailors.”
Borrowers are trying to avoid the fate of more than 230 exploration, drilling, production, servicing, transportation and storage companies that have gone bankrupt since the start of 2015, affecting about $96.2 billion of debt, according to data tracked by the Haynes and Boone law firm.
Despite last year’s rally, oil prices
are still down from more than $107 a
barrel in mid-2014, making debt loads based on those near-record levels
unaffordable. Lenders may want to
see sustained prices of at least $55
a barrel before agreeing to extensi-
ons, Cutter said.
Even then, bankers may hesitate because regulators issued stricter leverage guidelines last year on energy lending that suggests limiting debt to four times adjusted earnings. Approach Resources Inc., a Fort Worth, Texas-based producer, cited the cap as one motive for its pending debt-for-equity swap, telling investors it could chop leverage to 3.5 this year from 9.6 in 2016’s fourth quarter.
Last year’s oil price rally spurred some investors toward the “junkier names,” said William Costello, senior portfolio manager and research analyst at Westwood Holdings Group Inc., but he doesn’t see that as a winning formula. Companies without a foothold in the most profitable drilling areas, especially the Permian shale basin in Texas and New Mexico, will still struggle to perform, he said.
Vanguard had about 6 percent of its oil and gas acreage in the Permian as of October. Banks cut the company’s credit line a second time late last year, leaving it overdrawn, and Houston-based Vanguard has said bankruptcy “may be unavoidable.” Pacific Drilling, the ultra-deepwater driller with operations headquartered in Houston, said debt talks stalled after creditors demanded a bigger equity stake, and S&P Global Ratings is predicting no recovery for offshore contract drilling services until 2019.