By Julia-Ambra Verlaine
U.S. oil-and-gas companies need cash, but it won't come at a cheap price.
Explorers and producers have more than $85 billion of debt maturing over the next four years. Those with junk-rated debt will likely have a hard time tapping capital markets in 2020, increasing the odds for wave of defaults, according to a new report by Moody's Investors Service.
"Despite our expectation of a generally low interest rate environment globally, such companies face greater risk because of continuing overproduction, depressed natural gas prices and widespread investor risk aversion toward the exploration and production sector," said Moody's analyst Sajjad Alam.
The yield on the benchmark 10-year U.S. Treasury note has fallen this year, trading around 1.564% Wednesday, according to Tradeweb, versus 1.909% at the end of 2019.
A rally in riskier corporate bonds in January helped some energy companies with lower credit ratings issue new bonds and push back looming repayment dates.
But investors made it clear that terms wouldn't be generous for everyone. For example, natural-gas producer Range Resources Corp. paid 9.25% to borrow $550 million of bonds due in 2026, while oil-focused WPX Energy Inc. paid 4.50% to borrow $900 million of unsecured notes due in 2030, according to S&P Global Market Intelligence.
The difference in pricing underscores how investors have become increasingly selective in a sector where they lost considerable amounts of money through bankruptcies and distressed exchanges in the aftermath of the crash in oil prices in 2015.
"As you come out of each cycle in this industry, investors emerge increasingly aware of the risks and are more able to anticipate them," said Nick Fall, a managing director on the leveraged finance syndicate team at Barclays. "It remains a credit picker's market -- with overlay of hunt for yield. The recent volatility in commodity prices has further underscored this since the wave of activity in early January."
Junk-rated North American companies hold more than 62% of total exploration and production debt coming due over the next four years, with a majority due in 2022. Debt investors studying the refinancing prospects of these companies have already begun pushing their debt prices to distressed levels, according to Moody's.
The fortunes of exploration and production companies depend on oil and gas prices, which determine the value of their reserves and how much money they are able to borrow.
U.S. natural-gas producers face the highest hurdle, according to Moody's. Antero Resources Corp. and EQT Corp. have the largest looming debt maturities by 2024, with $2.6 billion and $2.5 billion due, respectively.
Investors and traders say refinancing costs will remain especially high for natural-gas producers without a sharp rebound in gas prices.
Natural-gas futures are trading below $2 per million British thermal units, highlighting how a persistent glut has buffeted energy investors and producers. This winter's mild weather has joined an oversupply of the commodity to push natural-gas prices down.
Analysts also say the boom in investing using environmental, social and governance criteria may be the nail in the coffin for deeply indebted energy companies.
"Some European banks and institutions are limiting their exposure to the industry due to ESG concerns, further reducing the investor base," said S&P analyst Paul Harvey. "Adding to the mix is continued oil price volatility and very low natural gas prices."
Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com
(END) Dow Jones Newswires
February 19, 2020 14:51 ET (19:51 GMT)
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