Investors keep funding oil, natural gas development

“I think part of it might be that financiers are hopeful of a turnaround,” said Chad Wilkerson, vice president, economist and Oklahoma City Branch executive at the Kansas City Federal Reserve Bank. “They’re still confident in the long-term prospects for the oil industry.
Source:newsok.com     Time:21 Jul 2015
 A year of lower oil prices has eroded energy company values and slowed industry activity, but lenders and investors still seem eager to hand over their money to help develop the country’s hottest oil and natural gas plays.
               
A worker hangs from an oil derrick outside of Williston, N.D. Investors are still clamoring to fund oil and gas explorations. AP File Photo
A survey this month from the Federal Reserve of Kansas City found that energy companies reported that private equity was more available than it had been in recent months, while financing from banks and other sources were less available. More than one-third of respondents, however, said equity and bond financing were more available.

“I think part of it might be that financiers are hopeful of a turnaround,” said Chad Wilkerson, vice president, economist and Oklahoma City Branch executive at the Kansas City Federal Reserve Bank. “They’re still confident in the long-term prospects for the oil industry.

“People are trying to make a good yield. The sector has provided that in recent years,” Wilkerson said. “There are tough times now, but people are looking for a place to make a good return.”

While the money is needed to help energy companies wait out the slowdown, Wilkerson said he has been surprised by some of the financing deals.

“It raises flags when firms are able to get more financing than they expected,” he said.

The oil and natural gas industry is an expensive business, requiring millions of dollars for each well drilled and millions more to replace the oil produced by those wells, either by drilling to prove existing assets hold more oil than previously reported or by buying new acreage.

In many cases, companies recently have had to refinance debt because the oil in the ground used as collateral is worth less than half what it was worth a year ago.

Whatever the reason, the money appears to be readily available.

Tulsa’s WPX Energy on Monday announced more than $1.8 billion in stock and debt offerings to help it buy Oklahoma City-based RKI Exploration & Production.

Oklahoma City-based SandRidge Energy Inc. last month completed a $1.25 billion debt offering, replacing an earlier credit facility. The new deal carries a much lower interest rate, fewer covenants and more flexibility.

Chesapeake Energy Corp. in December secured a $4 billion credit facility, replacing a more expensive facility for the Oklahoma City company set to expire at the end of this year.

Tulsa’s Magellan Midstream Partners in February sold $500 million in senior notes, saying it would use the money to repay borrowings under its revolving credit facility. ONEOK Partners, also based in Tulsa, in March expanded its lender group and increased commitments under its revolving credit facility to $2.4 billion, up from $1.7 billion.

Smaller companies also are taking advantage of investor and lender generosity.

Oklahoma City-based Tall Oak Midstream in June said two subsidiaries each closed $75 million credit facilities. Templar Energy LLC, also in Oklahoma City, in April reaffirmed its borrowing base under its revolving credit facility at $625 million.

Lenders’ optimism?

“There are a lot of reasons for lenders to be very hopeful that these low energy prices won’t last very long,” said Robert Dauffenbach, director of the Center for Economic and Management Research at the University of Oklahoma. “There might be a lot more willingness to try to ride this one out. I think they may well turn out to be justified so long as the economy — the U.S. and global economy — continue moving ahead.”

While most industry observers expect oil prices to climb in the long run, it’s unclear how long it will take for that to happen.

“I have fear that the international economy is not going to do as well as people are imagining,” Dauffenbach said. “But in the longer term, we have a growing world population with 7 billion-plus people, we have rising standards of living throughout most of the world.”

Price protection starts to dwindle

Most oil producers have been at least partially protected from lower oil prices because of hedging contracts that guarantee certain minimum oil sales prices. As those contracts expire, it could be more difficult for companies to attract lenders and investors, Wilkerson said.

“You would expect that source of funding is drying up,” he said. “When redeterminations are made in the fall, I think expectations are for slightly tighter conditions than in the spring, although spring was less tight than expected.”

Dauffenbach, however, said he is not surprised the energy sector has continued to attract eager investors.

“I have a very long-term view of the value of these resources. We’re temporarily depressed now. Temporarily, you can depress those prices, but who’d want to make a bet that five years from now we’re not looking at higher prices?”

In the short run, however, there is increased risk in already debt-ladened companies piling on more borrowings.

“Certainly there is every expectation that some firms won’t survive if prices stay low for very long,” Dauffenbach said. “But the resources don’t go away. The more conservatively managed companies stand to benefit.”
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