JUNK BONDS FUNDING SHALE BOOM FACE $8.5 BILLION OF LOSSES (Goodrich and Halcon Risk Default)
By Nabila Ahmed and Sridhar Natarajan - Dec 2, 2014 bloomberg.com
Bond investors who helped finance America’s shale boom are facing potential losses of $8.5 billion as oil prices plummet by the most since the financial crisis.
The $90 billion of debt issued by junk-rated energy producers in the past three years has fallen almost 10 percent since crude oil peaked in June. Halcon Resources Corp. (HK), SandRidge Energy Inc. and Goodrich Petroleum Corp. have been among the hardest hit as OPEC’s refusal to ease a supply glut pushed prices to a five-year low of $66.15 a barrel last week.
The oil selloff is deepening concern among bond investors that the least-creditworthy oil explorers will struggle to pay their obligations and prompt bankers to rein in credit lines as revenue slumps. Halcon, SandRidge and Goodrich are among about 21 borrowers operating in the costliest U.S. shale-producing regions that will be unprofitable if crude oil falls below $60 a barrel, according to data compiled by Bloomberg.
“We are concerned that there will be defaults and that was even before oil fell as much as it has,” Ivan Rudolph-Shabinsky, a New York-based money manager at Alliance Bernstein Holding LP, said in a telephone interview. “There was too much money going into this space that would have resulted in problems long term -- now that timeline has been accelerated.”
Junk Bonds
The 9.3 percent loss for junk-rated energy debt from U.S. and Canadian companies since January 2012 compares with a 1.55 percent decline for the broader U.S. speculative-grade market, Bank of America Merrill Lynch index data show. Non-investment grade energy bond yields average 8.54 percent, the most since July 2010, from a low this year of 5.68 percent in June.
Halcon Resources’s $1.15 billion of 9.75 percent securities issued in April 2013 have lost 29 percent since June 30, while SandRidge’s $750 million of notes sold in October 2012 have plunged 26 percent, Bloomberg data show. Goodrich Petroleum’s $275 million of debt issued at the start of 2012 has dropped 34 percent.
Scott Zuehlke, a spokesman at Halcon, Daniel E. Jenkins, a spokesman at Goodrich, and Duane Grubert at SandRidge didn’t return calls seeking comment on exposure to oil prices.
Advances in horizontal drilling and hydraulic fracturing, or fracking, have helped U.S. drillers pump the most in three decades. Companies have relied on debt financing to make up for cash shortfalls as they expanded, doubling energy bonds’ share of the high-yield market to 17 percent since 2008, according to a Oct. 14 report by Citigroup Inc.
Falling Oil
High-yield, high-risk debt is rated less than Baa3 by Moody’s Investors Service and under BBB- at Standard & Poor’s.
West Texas Intermediate crude dropped from a June high of $107.26, falling 17.9 percent in November after the Organization of the Petroleum Exporting Countries decided last week to keep its production target of 30 million barrels a day.
Output in the U.S. will climb to 9.5 million barrels a day next year, the most since 1970, the Energy Information Administration estimated Oct 7. Demand nationwide will slip this year to the lowest since 2012, the government predicted.
Lower oil prices will “affect cash flow but also capital spending, which in turn, affect projected production and cash flow in a downward spiral,” Gary Stromberg and Jan Trnka-Amrhein, analysts at Barclays Plc, wrote in a note to clients dated yesterday.
Borrowing Limits
Because the amount oil and gas companies are permitted to borrow from bank lenders is directly tied to the value of their reserves, falling commodity prices increase the risk they will face a cash squeeze, according to an Oct. 9 report by Spencer Cutter, an analyst at Bloomberg Intelligence in Skillman, New Jersey.
The extra yield investors demand to hold the bonds of energy companies instead of comparable U.S. Treasuries increased to 7.63 percentage points yesterday, more than double the premium in June, Bloomberg data show. The price of crude collapsed 35.7 percent during that period.
The issuance of debt has helped contribute to production growth in the U.S. and falling prices will make it harder for companies to meet their obligations, according to Virendra Chauhan, a London-based oil analyst with Energy Aspects Ltd.
“My sense is we’re just on the cusp of bad news there and we’ll see things get worse before they get better,” David Kurtz, global head of restructuring at Lazard Ltd., said at Beard Group Inc.’s Distressed Investing conference in New York yesterday.
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Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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Energy booms and busts are the norm. When the busts come those companies that have accepted excessive risk pay the price. One company's tragedy is often another's opportunity. If the reserves are perceived of value some company will pick them up at a deep discount.
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Permalink Reply by DTrucks on
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OPEC does not determine oil prices. Correct me if I'm wrong, but it looks like some sort of global revaluation and/or quantitative easing, where OPEC & global economists need to maintain production for "agreed" revaluations to stick. No??? Any feedback here would be appreciated; and thanks.
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How Low Will Oil Price Go? Remain?
http://oilpro.com/q/1588/low-price-oil-go
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Permalink Reply by William Howard Pritchartt on
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I can attest to the phones not being answered. Since I live just down the street from HQ on the 67th floor of the Wells Fargo Building I think I need to drop by dressed as Santa and bring gifts of tidings and joy. Prepaid trac phones from Walmart are great stocking stuffers and are around $10.00 each but Halcon Stock is much cheaper but unlike the trac phone it does not come with a warranty and there is no guarantee of customer satisfaction as does all things tied to China being the cause.
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Permalink Reply by William Howard Pritchartt on
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Update!
Communications via e-mail re: Martens #1 to the mutual benefit of yours truly (vested interest owner) and the operator warrant appreciations with X-Mass gift to the land department. Still no verbal communication which is understandable.
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Permalink Reply by Skip Peel - Mineral Consultant on
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GDP officers sell stock. Hardly seems worth it @ $4/share.
http://www.wkrb13.com/markets/445491/goodrich-petroleum-svp-sells-3...
http://tickerreport.com/banking-finance/369756/insider-selling-good...
http://www.wkrb13.com/markets/445436/goodrich-petroleum-cfo-jan-l-s...
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Permalink Reply by tc on
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These sales mean nothing about the future of GDP stock. Unfortunately the media never does any research and the masses follow them over the cliff. The #1 reason stock is sold in December is because of taxes. Most people have no idea the complexity of corporate pay. Every year in December the officers of GDP sell stock and they exercise options. In 2013, there were 44 transactions (per Yahoo) where officers/directors of GDP received shares thru the exercise of options and sold shares thru direct sales.
This is the link within the link for the sale of Robert C. Turnham shares. The sale of 20,,974 shares has a small (4) after it and below under Explanation of Responses: 4. Shares sold to cover federal tax obligations associated with the phantom stock vesting on December 11, 2014 detailed in Table II.
http://www.sec.gov/Archives/edgar/data/943861/000114036114045272/xs...
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Permalink Reply by Skip Peel - Mineral Consultant on
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There is relevance beyond the reason cited for Mr. Turnham. One is the surprisingly small stock holdings of the major officers whose sales are reported. The other is the fact that no "insider" would sell all their stock in one transaction.
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You call Mr. Turnham's 463,096 shares after the sale a small holding? Insiders own over 20% of GDP's stock. The stories you are linking are full of mistakes and leading you to bad assumptions.
Goodrich may collapse, but these sales are irrelevant to that possible event.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Thanks for the correction, tc. The article indicated that Mr. Turnham owned a lot less shares.
Goodrich Petroleum (NYSE:GDP) COO Robert C. Turnham, Jr. sold 20,974 shares of the stock in a transaction
dated Friday, December 12th. The shares were sold at an average price of $4.08, for a total transaction of $85,573.92. Following the completion of the transaction, the chief operating officer now directly owns 4,000 shares in the company, valued at approximately $16,320.
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Permalink Reply by DellP on -
Forbes Article: Goldman Sachs analysts figure that $1 trillion of oil investments are virtually worthless as long as prices stay this low, because marginal fields are simply not worth drilling.
http://www.forbes.com/sites/christopherhelman/2014/12/19/who-will-g...
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Permalink Reply by Skip Peel - Mineral Consultant on
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Goodrich Petroleum Considers Sale of Eagle Ford Assets
Company Slashes Capital Spending in 2015
Dec 31, 2014 By Kirk Eggleston
Goodrich Eagle Ford Map | Click to Enlarge
Eagle Ford player Goodrich Petroleum is considering selling all or a portion of its Eagle Ford Shale acreage in the first half of 2015. In early December of 2014, the Houston, TX-based company announced its Board of Directors had authorized management to “explore strategic alternatives” for the assets.
Goodrich, which has invested significantly in the Tuscaloosa Marine Shale (TMS) in South Louisiana and Mississippi, also announced its capex budget for 2015 this month at $150-million – $200-million. That’s much less than the than $375-million budget the company projected in 2014, according to Goodrich’s annual report. Company officials indicate about 95% of Goodrich’s 2015 budget will be earmarked for drilling in the TMS.
Since June of 2014, the price of oil has dropped by nearly 50%, and Goodrich’s pullback on capital investment is a strong indication of the impact of lower crude oil prices on shale oil operators. Company officials indicate a whole or partial sale of its Eagle Ford assets would significantly enhance the company’s flexibility to further expand its development activities under better market conditions.
Goodrich has approximately 45,000 (30,000 net) acres in the Eagle Ford, with an estimated 383 (255 net) un-risked drilling locations remaining, according to company officials. Goodrich entered the Eagle Ford early in 2010, paying approximately $1,650 per acre.
We’ll keep an eye out for any new details about Goodrich’s potential exit from the Eagle Ford. Stay abreast of all EagleFordShale.com updates by subscribing to our newsletter.
Read more at GoodRichPetroleum.com
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