Energy companies took advantage of cheap money and borrowed heavily in the US leveraged loan and high-yield bond markets after the financial crisis to finance shale and off-shore oil exploration.

There were $72.2 billion (46 billion pound) leveraged loans outstanding in the US for energy companies and $225 billion of high-yield bonds at the end of October, according to Thomson Reuters LPC and Fitch Ratings data.

This is nearly triple the amount of debt from five years ago when there were $25 billion of US leveraged loans and $85 billion of US high yield bonds outstanding for energy companies.

Energy issuers make up 10 percent of the leveraged loan market and 17 percent of the high yield bond markets in the US.

Declining benchmark oil prices are cutting into cash flows and liquidity and pushing borrowing costs higher in the debt capital markets.

While this is not expected to be enough to tip companies into debt restructuring in the short term, it could hit companies' ability to manage their debt in the longer term.

“In the near term, the decline in oil prices will not push previously healthy companies into a restructuring,” said JP Hanson, head of Houlihan Lokey’s Oil & Gas Exploration & Production practice.

“But it will likely affect companies that are both dependent on oil prices holding up and waiting for a capital markets or M&A transaction to happen.”

DEBT COST RISING

The slump in oil prices is making it more expensive for energy companies to raise new debt in the capital markets. West Texas Intermediate oil prices have dropped from a 52-week high of $107.30 per barrel in June to $75.38 on Tuesday.

Credit spreads for energy high yield bonds now trade at 552bp over treasuries, a rise of over 200bp from year lows seen in June, according to Bank of America Merrill Lynch.

Endeavor International, a Houston-based oil and gas developer with assets in the North Sea, was unable to free up cash from its heavy debt load while experiencing drilling delays, which resulted in a Chapter 11 filing in October. 

While Endeavor’s problems ran deep, restructuring bankers see several options for energy companies seeking to raise funds, including asset sales and structured financing before debt restructuring becomes necessary.

“High yield oil and gas companies, especially those run by entrepreneurs, have seen cycles and are looking to extend the liquidity runway,” said Thane Carlston, co-head of the recapitalisation and restructuring group at Moelis.

“Energy companies under pressure will explore asset sales and highly structured debt or senior equity solutions to continue developing projects that realise the value of underlying reserves before they consider a restructuring.”

Unlike manufacturing companies that can shut plants and negotiate with suppliers to cut costs, energy companies have less flexibility to reduce operating expenses once capital has been committed to exploration projects.

Servicing debt depends on continued access to oil lease rights and permits to extract crude, which is being made more difficult by shrinking liquidity and soft prices for distressed energy producers. This is particularly true for those with projects in relatively early stages of development.

Waiting for commodity markets to rise may not be enough to help some energy companies ride out the cycle and seasoned restructuring experts are already advising clients to explore third party help at an early stage.

Any financial recommendation will however hinge upon on the development stage of exploration projects.

“There is a not a one size fits all solution for advising leveraged energy companies as they may be in various stages of expansion,” said Tim Coleman, global head of Blackstone’s restructuring group.

“Some may be in the middle of an exploration programme, while others are focussed on securing strategic permits – the key is being able to find strategic partners willing to help delever and develop critical reserves.”   

(Editing by Tessa Walsh)

By Billy Cheung