NEW YORK, Feb 5 (IFR) - US oil and gas company CrownRock prised open a small funding window in the high-yield market this week, helped by a spurt in crude prices, but bankers warned the E&P sector remains fraught with challenges.
Credit Suisse priced CrownRock’s Triple C rated US$350m eight-year non-call three bond on Tuesday at a slight discount at 98.536. It ended a three-month hiatus for E&P high-yield deals, and did so in style with a US$50m upsizing on the back of a US$1.5bn order book.
The strength of demand, coupled with a 2.5 point rise on the break, gave the sector a much needed boost of confidence.
It partly came down to good timing. The bookrunners on the trade - which also included Citi, MUFG and Wells Fargo - pushed the deal out following a near 20% rise in US crude over the previous few days.
The company’s location in the Permian basin - a low cost drilling area - and the fact it is relatively well hedged against volatile crude prices also helped ensure the trade’s success.
“There has been a relatively strong rally in E&P names over past weeks and investors are focused on issuers in the right basins and low cost structures,” said one syndicate banker.
As of September 2014, CrownRock had 14.1m barrels of oil hedged at an average price of US$87.33 per barrel and 900m cubic feet of natural gas hedged at an average of US$4.68 per thousand cubic feet.
“While we have hedged a significant portion of our projected oil production through 2018, our average realized prices for oil will continue to decrease as a result of further decreases in oil prices,” the company said in its Offering Memorandum.
“However, because we elected an initial borrowing base of US$450m for our revolving credit facility, instead of the maximum potential amount of US$575m, we do not expect any near term negative impact to our borrowing base due to lower commodity prices,” the memorandum added.
CrownRock, owned by private equity firm Lime Rock Partners, will use proceeds to fund continued expansion and to repay borrowings under its revolving credit facility. Those borrowings stood at US$130m as of February 2, 2015, according to the OM.
It entered into an amendment to its revolving credit facility in January to issue up to US$400m of senior unsecured debt on or before March 31, 2015, with no reduction to its borrowing base.
It may be difficult, however, for other E&P companies in a more fragile state, to replicate CrownRock’s bond success, said bankers.
“CrownRock is in the right basin. That will be a big factor on which E&P companies access the market,” said one syndicate banker. The location of drilling will also be crucial, with investors favoring other sweetspots such as Bakken and Eagle Ford.
In the first half of the year, before the unexpected slide in crude prices, E&P firms had been among the most prolific high-yield issuers, using the debt capital markets to refinance revolvers that had previously paid for capex and drilling.
In all, E&P accounted for some 16% of last year’s high-yield supply, according to Thomson Reuters/SDC data.
Many are now scrambling to line up billions of dollars of emergency financing ahead of biannual resets of revolvers in the spring, and again in the fall, amid expectations that banks will reduce the size of facilities.
Access to debt capital markets will depend to a large extent on whether oil prices stabilize. On Wednesday, a day after the CrownRock deal priced, oil prices took another tumble.
Bankers said the last true E&P company to bring a deal to market before CrownRock was SM Energy back in November. The Double B rated issuer raised US$600m from an eight-year non-call four senior unsecured bond that priced at par to yield 5.00%, the tight end of 5.00%-5.25% price talk.
The bankers discounted a US$1.1bn three-year issue for Targa Resources in January, saying that was a mid-stream company, which is likely to be lifted to investment-grade over the next 12 months.
“For the right situations, we are willing to bring deals to the market,” said another high-yield banker. He warned, however, that they would probably need high new issue concessions to attract enough demand from investors even though CrownRock seems to have paid next to nothing.
CrownRock’s bond pays a coupon of 7.75% and yields 8.0%. The company’s existing 7.125% 2021 was trading around 7.7%, allowing the new bond to trade through its existing issue.
A new issue concession was difficult to calculate as CrownRock’s 2021s and peer comparables’ secondary trading levels were a few business days stale, bankers said.
Diamondback Energy’s 7.625% notes due 2021, trading to yield around 6.98%, and Parsley Energy’s 7.50% 2022 bond, trading to yield 7.26%, served as pricing reference points. (Reporting by Mariana Santibanez; Editing by Natalie Harrison and Shankar Ramakrishnan)