HOUSTON –
By Joseph Triepke
View the original article on Oilpro.com.
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2016 has seen a flood of new oil industry equity issues - approaching $10bn in total - as increasingly strained O&G companies try to gain some financial flexibility.
The run on Wall Street funding is a signal that the credit window available to the industry may be rapidly closing. Dilutive equity raises at this point in the cycle might best be described as aggressive prudence. Companies are issuing secondary offerings to hang on to some liquidity visibility with tough times now all but assured into 2017.
With access to debt diminishing, equity raises during 1H16 may be the last best chance for many in the industry to bring in outside capital to ensure survival in an extended trough period.
E&Ps Hit The Bid First, Oilfield Service Firms May Be Next
So far, most of the new issues have been from E&P companies, but a series of equity raises for oil service firms could be starting now. Late Tuesday, Weatherford priced an equity offering of 100mm new shares at $5.65, a 9% discount to market price. The result will be a capital inflow for the company of $565mm less brokerage fees, which will be used in part to repay debt.
The equity raise, while dilutive to Weatherford shareholders, is a fiscally responsible move. Weatherford management just extended their liquidity visibility in an uncertain environment marred by falling oil service demand, declining rig counts, and fading credit availability.
Like many of its peers, Weatherford has significant debt maturities ahead in 2017, including approx. $600mm of bond principal. And the company's $2.25bn revolving credity facility (approx. $1bn drawn) matures July 13, 2017.
Weatherford has already begun the process of re-negotiating the credit line agreement; however, revolvers across the industry are being reduced upon renewal in this environment. Some decline in the credit line even for large, well-known companies like Weatherford is to be expected.
Weatherford Debt Distribution
Source: Bloomberg
Weatherford Has Plenty Of Company Shoring Up Balance Sheets
On Monday this week, Marathon Oil raised approximately $1.1bn to strengthen its balance sheet.
In January, Pioneer Natural Resources raised $1.6bn, a move CEO Scott Sheffield said was necessary to give his company a 2-year period of financial visibility.
Hess, Devon, and QEP are just a few other examples of E&Ps that have tapped Wall Street for financial flexibility already this year.
In oil service, several smaller players will start to breach debt covenants (EBITDA provisions) this year or next without some unforeseen spike in oil prices and activity. Many have visibility on liquidity into 2017, but not much further if conditions keep deteriorating. If the credit windows are truly closed or rapidly closing, equity raises during 1H16 may be the last best chance for many in the industry to bring in outside capital to ensure survival in an extended trough period.
Should lenders demand debt repayment upon tripping the covenants, equity dilution will be necessary. And with the equity window open as proven by Weatherford and the flood of E&P raises, we may see more oil service firms proactively tapping Wall Street funding to cushion balance sheets ahead of a coming crunch.
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