North America’s small and mid-sized energy companies are searching for creative ways to stay afloat as investors smell blood in the water from the almost 60 per cent fall in the price of oil since June 2014.
Oil and natural gas companies are straining for solutions before cuts in credit lines and increases in lending rates hit home in April, when banks re-price the collateral used to secure revolving credit lines. Some are turning to more creative forms of financing as familiar sources of money dry up.
That financing is coming from hedge funds, private equity shops and mega-wealthy investors like billionaire Carl Icahn who has the cash to weather a prolonged downturn and are on the hunt for deals among the wounded, bankers and analysts say. Oil operators, meanwhile, are laying-off staff, freezing salaries and deferring investments to conserve cash.
“Companies have lived in a state of outspending cash flow, and the markets have facilitated that,” said Gregory Sommer, who runs energy investment banking at Deutsche Bank AG in New York. “But if prices persist at this level, you’re going to see some companies pulling back significantly” more than they already have.
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Eclipse Resources Corp. turned to private equity investors in December after the cost to issue unsecured debt to fund capital spending became prohibitively expensive, according to Matthew DeNezza, the company’s chief financial officer.
“Traditional, high-yield debt markets were not available” at reasonable prices, DeNezza said in a telephone interview. “The debt markets were closed to us.”
Shares of the State College, Pennsylvania-based driller, have fallen by 77 percent since it raised $818 million in its initial public offering on June 20, when US oil prices were $107 a barrel. In a deal announced three days before the New Year, Eclipse sold $325 million in additional equity to its largest investor, EnCap Investments, and brought in extra money from private-equity firm KKR & Co. to help fund drilling operations in 2015, DeNezza said.
Private equity investors, he said, can look past the market turmoil and “take a longer-term view of what these assets are really worth.”
The firms have already raised $15 billion for general energy investing in recent years. Carlyle Group LP, Apollo Global Management LLC, Blackstone Group LP and KKR are raising billions more for new funds created in the past few months to invest in distressed oil producers.
Blackstone, in addition to closing a $4.5 billion energy fund, is asking its clients for more than $1 billion for two new energy funds to buy bonds of troubled oil producers and to provide rescue financing, a person with knowledge of the plans said last week.
“It will take companies 1 1/2 years to really get into a lot of trouble, but for some of the service companies it’s just going to happen very, very quickly,” Steve Schwarzman, Blackstone’s chief executive officer, said on a January 29 investor call. “You’re going to see all kinds of shakeouts over the period of a year to three years.”
Traditional bond investors, meanwhile, are demanding increasingly higher yields as sentiments swing wildly away from the easy capital flow of recent years. Energy companies tapped into $550 billion in new debt and loans between 2010 and late 2014, according to Deutsche Bank data, money not easily rolled over after the oil price rout.
At least three mid-sized energy-related borrowers, including C&J Energy Services Inc., postponed financings late last year as the market turned against them.
Fitch, JPMorgan Chase & Co. and others on Wall Street predict oil prices, when they rebound, will probably settle at somewhere around $75 a barrel. Goldman Sachs Group Inc. president Gary Cohn, a former oil trader, predicted January 26 that prices could first fall to $30 a barrel.
