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Bond Investors Should Not Be Overly Surprised With Chesapeake Energy‘s
bankruptcy.
The oil and gas producer filed for Chapter 11 bankruptcy protection in a South Texas court on Sunday, after the company and its creditors agreed to the guidelines of a restructuring plan that would eliminate $ 7 billion of debt. Chesapeake (ticker: CHK) plans to sell $ 600 million in new shares to a group of fund managers as part of that deal; Its market capitalization was $ 116 million as of June 26, so the sale of shares will drastically devalue current shareholder interests in the company. The stock halted on Monday, and NYSE said it started cutting procedures, though the company said it believes its shares will continue to trade through the process.
Bond markets issued warning signs about Chesapeake long before the coronavirus pandemic put pressure on oil and gas producers and created turmoil in futures markets. Chesapeake bond yields have been trading at distressed levels, producing more than 10 percentage points more than Treasuries, since August 2019.
Part of the energy price pressure has risen thanks to the rebound in oil to around $ 40 per barrel. However, many oil and gas companies still face high borrowing costs and depressed stock prices.
Excluding Chesapeake, approximately one third of the face value of energy bonds in the ICE BofA High Yield Bond Index is trading at distressed levels. That constitutes about 2.8% of the index itself.
The following is a list of 10 struggling and not very struggling oil and gas companies:
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Noble (NE):
Wall Street equity analysts are generally not a very pessimistic group. So it’s remarkable that Jacob Lundberg of Credit Suisse told him Barron’s In May, he believes Noble, an offshore driller, will likely need to restructure his debt in the next six months. Noble’s shares have declined 73% so far this year, and its long-term bonds are trading at two or three cents on the dollar.
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Valaris (VAL): Valaris is another offshore driller that Lundberg said could undergo restructuring in the second half of this year. Many of its bonds are trading at around 10 cents or less, and its shares have fallen 89% to date.
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Oasis Petroleum (OEA): This oil exploration and production company warned investors of its ability to continue as a going concern in its first-quarter earnings report. Oasis has cut capital spending enough that it can survive 2020, but it will be a difficult task to honor its debt contracts until the end of this year, says independent credit research firm CreditSights. Its shares fell 76% this year and its bonds maturing in May 2026 are trading at 17 cents on the dollar.
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Forum Energy Technologies (FET): This drilling equipment maker bought a tranche of its bonds at a steep discount, a move that some rating firms call selective default. Although Forum has already completed the debt exchange, S&P Ratings said on June 18 that the company could go through another exchange or a restructuring within the next six months. Its shares fell 67% this year and its 2021 bonds are trading at 41 cents on the dollar.
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Denbury Resources (DNR): About 98% of the reserves owned by this Texas-based exploration and production company are oil, which was more affected than natural gas during the liquidation of March and April. Most importantly, in the last check, the company had approximately $ 636 million in debt maturing next year. That means “it is questionable whether the company can achieve its debt restructuring goals without a Chapter 11 filing,” says credit research firm Gimme Credit. Its shares have fallen 76% to date and its bonds are trading at 39 cents on the dollar.
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Callon Petroleum (CPE):
This Texas oil exploration and production company completed a plan in May to swap debt for new bonds valued at about 40% of face value, a huge discount. If it had been carried out with the plan, that would have been a default, says S&P Ratings. The credit rating firm improved Callon after news that it had abandoned the plan. But Callon’s bank lenders have tightened their credit. While the company said it would try to sell non-core assets to raise cash, S&P said the effort “could be difficult under current market conditions.” The stock is down 76% so far in 2020.•
Transocean (RIG): This drilling and oilfield services company was named by Credit Suisse’s Lundberg as a somewhat better bet than its peers Noble and Valaris. Still, S&P Ratings downgraded Transocean’s rating to an eight-tier rating below investment grade in April due to challenges in the overall market. S&P analysts said “further downgrades are possible in the future due to” Transocean’s unsustainable leverage, heavy debt burden and increasing likelihood of a distressed change or restructuring. “Its shares fell 74% this year.
• Rank Resources (RRC): Not all Range Resources bonds trade at distressed-level yields: its 2022 bonds yield 9.8 percentage points more than Treasuries. That could be because the oil and gas producer is making a concerted effort to reduce debt, as executives said in the company’s earnings call on May 1. But it has a lot of ground to cover; in early April, it had $ 72 million in debt maturing this year and next, Moody’s said. CreditSights analysts said in May that the company would have to sell assets to meet its debt reduction targets, but like Callon, it could have difficulty finding buyers in current market conditions. However, their stocks have risen 14% to date.
The following corporate bonds are investment grade rated, but yield at least seven percentage points more than Treasuries, margins wider than about 78% of the high yield market. This implies that they are at risk of sales or other problems:
• Patterson-UTI Energy (PTEN): Cuts in capital spending by oil companies are expected to affect the incomes of offshore drillers and US onshore drillers like Patterson-UTI. The company has a high-yield S&P rating, and its Moody’s investment-grade rating is only two tiers above junk and has a negative outlook. On the positive side, Patterson does not have large debt maturities until 2022, says S&P. The stock is down 67% this year, with its 2029 bonds yielding 8.5 percentage points more than Treasuries.
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Ovintiv (OVV): This North American oil and gas exploration and production company has made the S&P Ratings list of “possible fallen angels,” or investment-grade companies that could be downgraded, along with Patterson-UTI. The company’s bonds yield 7.1 to 8.2 percentage points more than Treasuries, and stocks fell 60% this year.
Corrections and amplifications: Range Resources has $ 72 million debt maturing before 2022. An earlier version of this story incorrectly stated that it had $ 720 million.
Write to Alexandra Scaggs at [email protected]
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