Wednesday, July 22, 2015

"It’s Happening: Debt Is Tearing up the Fracking Revolution"

A topic of abiding interest. As noted in the intro to last week's "The Economist: The ingenuity of America’s shale industry is admirable, the state of its finances awful":
The Exploration & Production companies were able to weather the first trip below $50 (WTI) by selling stock. That won't be as attractive an option this time around.
We'll be coming back to this opportunity a couple times this week.
The Economist:...
WTI (Sept.) $49.14 down $1.72.
From Wolf Street:
The shares of Chesapeake Energy, second largest natural-gas driller in the US, crashed nearly 10% today, to $9.29, the lowest price since August 2003, down nearly 70% since oil began to plunge a year ago. The company’s $1.1 billion of 5.75% notes fell to an all-time low of 84.88 cents on the dollar. And its 4.875% notes dropped to 81.25 cents on the dollar, from 86 last week, according to S&P Capital IQ LCD.
All this in the wake of its announcement that it would suspend its dividend for the first time in 14 years. It’s trying to conserve cash, and that dividend costs $240 million a year. It’s dumping assets as fast as it can, including some Oklahoma fields that will save it another $75 million a year in preferred dividends. It’s cutting operating costs and capital expenditures. It’s trying to stay alive.

It has been cash-flow negative in 22 of the past 24 years, according to Bloomberg.
The only thing surprising is that it took so long, that Wall Street kept funding its cash-flow negative operations and dividends for all these years.

Chesapeake used to be mostly a natural gas producer. But the price of natural gas plunged over five years ago and has remained below the cost of production for most wells for much of that time. The only saving grace was that these wells also produced natural-gas liquids and oil, which sold for much higher prices. As its natural-gas business model collapsed, Chesapeake began chasing after oil-rich plays. But a year ago, the price of oil collapsed.

Among natural gas drillers, Chesapeake isn’t in the worst shape. Much smaller Quicksilver Resources filed for Chapter 11 bankruptcy in March. It listed $2.35 billion in debts and $1.21 billion in assets. The difference has been forever drilled into the ground. Stockholders got wiped out. Creditors are fighting over the scraps.

Then there’s natural gas driller Samson Resources. It was acquired by a group of private equity firms, led by KKR, in 2011 for $7.2 billion. Since then, Samson has lost over $3 billion. When Moody’s downgraded Samson to Caa3 in March, it pointed at, among other things, “chronically low natural gas prices” and invoked “a high risk of default.” Samson warned it might have to resort to bankruptcy to restructure its debt.
At the time, a JPMorgan-led group, which holds a $1 billion revolving line of credit, granted Samson a waiver for an expected covenant breach to avert default. But the group reduced the size of the revolver. Last year, the same group had already reduced the credit line from $1.8 billion to $1 billion and had also waived a covenant breach.

“Liquidity death spiral,” is what S&P Capital IQ called this principle by lenders to whittle down the size of the loan as the company runs deeper into trouble, as I wrote at the time. It eventually ends in bankruptcy.
On August 15, Samson has to make an interest payment of $110 million on a $2.25 billion junk-bond issue. That date is coming up in a hurry. And its debt “continued to wallow around record lows today after press reports circulated about restructuring negotiations along two different paths,” S&P Capital IQ LCD’s reported today.

The loan investor group want to find new money to get the company through a Chapter 11 bankruptcy. The bondholder group wants to find new money to fund an out-of-court restructuring via a debt swap.
Samson’s covenant-lite second-lien term loan due 2018 was quoted at 31.5/33.5 cents on the dollar. Its 9.75% notes due 2020 were “essentially worthless.”

And more bloodletting among energy credits today: California Resources’ 6% notes fell to 77 cents on the dollar, a record low, according to S&P Capital IQ, “amid a repricing of the energy sector and more broadly a sell-off in commodities credits this week as oil and precious metals probe lower levels.”

Time and again, despite the collapsed prices of oil and gas, the players in the shale revolution have gotten more funding from Wall Street, whose ZIRP-blinded clients kept gobbling up the newly issued junk bonds, leveraged loans, and shares, taking on huge risks and hoping to make a little extra money in a Fed-laid minefield where all decent assets are way overpriced.

During the first half of 2015, according to Bloomberg, deeply troubled shale drillers were able to sell $32 billion in new debt and $12 billion in equity, in total $44 billion, more than during any half-year period since the go-go days of 2007....MORE