With shale gas producers showing discipline by holding off on drilling new wells despite a tempting forward curve and investors hungry for higher yields, the credit window has reopened for gas drillers in the new year.
Bond buyers snapped up two new issues by Appalachian exploration and production companies, or E&Ps, in January: a $600 million offering by Range Resources Corp. and a $700 million offering by Antero Resources Corp. Both bonds are due in 2029 and both increased their face value from the $500 million in their original sales announcements.
“Recent issuance from Antero and Range shows that the market is open,” credit research firm CreditSights’ senior analyst for high yield oil and gas Jake Leiby said. “Owing both to a more constructive view on the commodity price outlook and the general shift in corporate capital allocation philosophies towards free cash flow generation and away from production growth. Elevated yields in a low-yield environment are another factor driving demand for energy paper.”
Shale gas credit has labored for nearly a year since S&P Global Ratings slapped downgrades on six shale gas E&Ps on the eve of the COVID-19 pandemic in February 2020, because of low prices as supplies increased and weather was warmer than expected.
S&P Global Ratings responded to Antero’s offering, which pushes $311 million due 2022 out to 2029 with enough left over to pay down some of its revolving credit line, with a one-notch upgrade to B on Jan. 11. Moody’s bumped its rating on Antero up a step to B1 on the same day.
“Antero has settled liquidity issues which dogged the company for several years,” Northland Securities Inc. shale oil and gas analyst Subash Chandra told his clients Jan. 13. “They have more than enough liquidity to manage debt maturities over the next three years compared to a $1 billion deficit a year-ago.” Antero is in “good shape” to negotiate a renewal of its credit revolver when it matures in October 2022, Chandra said.
Oil and gas investors flocked to Antero, Range and other shale gas stocks for safety as the oil market melted down in 2020, a crater oil producers are still climbing out of. A year after bond buyers worried that shale gas producers would default, the sector’s stocks thrived during the down year as drillers cut spending and kept costs aligned with revenue rather than grow production volumes.
Not every company made it to 2021 intact. Oklahoma City shale oil and gas producers Chesapeake Energy Corp. and Gulfport Energy Corp. were forced to file for Chapter 11 protection. But after a peak in early spring, default fears have passed for Antero and Range, according to S&P Global Market Intelligence’s Market Signal Probability of Default metric, which combines balance sheet basics with stock trading data to produce a measure of market outlook on a firm’s default risk.
CreditSights’ advice for other shale E&Ps looking to refinance debt is to act now while the window is open. “The prudent move for high yield energy companies facing maturities over the next couple of years would be to take advantage of receptive capital markets to refinance their near-term obligations,” Leiby said.
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