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US shale oil firms raise enough equity to avoid loan reset squeeze
[HOUSTON] Despite a 50 per cent slide in crude prices since last summer, US shale oil producers are enjoying remarkably easy access to capital markets and this will allow them to avoid getting squeezed when banks reset their loans in April.
A surge in equity issuance so far this year by oil and gas companies has surprised many who in December thought the price drop would hurt the ability of producers to tap capital markets.
But investor appetite has held up in the first quarter, amounting to a vote of confidence in the ability of shale oil companies to weather the storm by relying on hedges and slashing spending to show a commitment to capital discipline. "Because the capital markets are so good, companies that are more worried about their borrowing base are able to ... raise either debt or equity, take those proceeds, and reduce their borrowing base," said Timothy Perry, a managing director for energy investment banking at Credit Suisse in Houston.
He said one client had reduced its borrowing base by two-thirds after doing a capital market deal.
According to Thomson Reuters Deals Intelligence, there have been 29 US oil and gas equity deals so far this year that raised US$13.9 billion, the highest volumes for that period in 15 years.
Banks typically reassess loans in October and April, and some have started to trim the value of reserves tied to credit lines by US$10 to US$20 a barrel from the mid-$70s.
That is expected to marginally reduce loans a bit in the sector, but not as much as initially feared.
Some of the demand for new issues stems from the notion among investors that companies can survive with oil around where it is now, in the mid-$40s, and do better if prices recover. "People view these companies as important. They are needed for the oil and gas supply situation, they are competitive assets and they are going to produce and earn a margin at mid-cycle," said Robert Santangelo, co-head of equity capital markets origination in the Americas at Credit Suisse.
A slew of takeovers are expected in the US oil industry, though so far there have not been many deals as buyers and sellers cannot agree on valuations because of volatile oil prices. "M&A will follow, M&A tends to take a little bit longer," said Osmar Abib, global head of oil and gas investment banking at Credit Suisse.