Bond investors shouldn’t be too surprised by Chesapeake Energy’s bankruptcy.
The oil and gas producer filed for Chapter 11 bankruptcy protection in a South Texas court on Sunday, after the company and its creditors agreed on the outlines of a restructuring plan that would eliminate $7 billion of debt. Chesapeake (ticker: CHK) plans to sell $600 million of new shares to a group of fund managers as part of that deal; its market capitalization was $116 million as of June 26, so the share sale will sharply devalue current shareholders’ stakes in the company. The stock was halted on Monday, though the company said it believes that its shares will continue to trade through the process.
Bond markets were flashing warning signals about Chesapeake long before the coronavirus pandemic put pressure on oil and gas producers and created turbulence in futures markets. Chesapeake’s bond yields have been trading at distressed levels—yielding more than 10 percentage points higher than Treasuries—since August 2019.
Some of the energy price pressure has lifted thanks to oil’s rebound to around $40 per barrel. Yet many oil-and-gas companies still face high borrowing costs and depressed share prices.
Excluding Chesapeake, about one-third of the face value of energy bonds in the ICE BofA High Yield Bond index are trading at distressed levels. That makes up about 2.8% of the index itself.
A list of 10 distressed and not-quite-distressed oil-and-gas companies follows:
• Noble (NE): Wall Street equity analysts usually aren’t a very pessimistic bunch. That’s why it is notable that Jacob Lundberg from Credit Suisse told Barron’s in May that he thinks Noble, an offshore driller, will probably need to restructure its debt within the next six months. Noble’s shares have declined 73% so far this year, and its long-term bonds are trading at two to three cents on the dollar.
• Valaris (VAL): Valaris is another offshore driller that Lundberg says could go through a restructuring in the second half of this year. Many of its bonds are trading around or below 10 cents on the dollar, and its stock is down 89% year to date.
• Oasis Petroleum (OAS): This oil exploration and production company warned investors about its ability to continue as a going concern in its first-quarter earnings report. Oasis has cut capital spending far enough that it could survive 2020, but it will be a tall order to stay in compliance with its debt contracts until the end of this year, says independent credit-research firm CreditSights. Its stock is down 76% this year and its bond maturing in May 2026 is trading at 17 cents on the dollar.
• Forum Energy Technologies (FET): This drilling equipment maker bought back one tranche of its bonds at a steep discount—a move that some ratings firms call a selective default. While Forum has already completed the debt exchange, S&P Ratings said June 18 that the company could go through another exchange or a restructuring within the next six months. Its stock is down 67% this year and its 2021 bonds trade at 41 cents to the dollar.
• Denbury Resources (DNR): About 98% of the reserves held by this Texas-based exploration and production company are oil, which was hit harder than natural gas during the March and April selloff. Most important, at last check the company had about $636 million of debt maturing next year. That means it “is questionable whether the company can achieve its debt restructuring goals without a chapter 11 filing,” says credit-research firm Gimme Credit. Its stock is down 76% year to date and its bonds are trading at 39 cents on the dollar.
• Callon Petroleum (CPE): This Texas oil exploration and production company in May terminated a plan to exchange debt for new bonds valued at about 40% of par value, a steep discount. If it had gone through with the plan, that would have constituted a default, says S&P Ratings. The credit-ratings firm upgraded Callon after news that it had abandoned the plan. But Callon’s bank lenders have tightened up on its credit. While the company said it would try to sell non-core assets to raise cash, S&P said the effort “could be difficult in current market conditions.” The stock is down 76% so far in 2020.
• Transocean (RIG): This driller and oilfield services company was named by Credit Suisse’s Lundberg as a somewhat better bet than its peers Noble and Valaris. Even so, S&P Ratings downgraded Transocean to a rating eight tiers below investment grade in April because of the challenges in the broader market. S&P’s analysts said that “further downgrades are possible in the future because of Transocean’s “unsustainable leverage, heavy debt burden, and the increasing likelihood of a distressed exchange or restructuring.” Its stock is down 74% this year.
• Range Resources (RRC): Not all of Range Resources ’ bonds are trading with distressed-level yields: Its 2022 bonds yield 9.8 percentage points more than Treasuries. That could be because the oil and gas producer is making a concerted effort to reduce debt, as executives said in the company’s May 1 earnings call. But it has a lot of ground to cover; as of early April it had $720 million of debt maturing this year and next, Moody’s pointed out. Analysts at CreditSights said in May that the company would have to sell assets to meet its debt-reduction goals, but much like Callon, it could struggle to find buyers in current market conditions. Nevertheless, its stock is up 14% year to date.
The following companies’ bonds are rated investment grade but yield at least seven percentage points more than Treasuries—wider spreads than about 78% of the high yield market. That implies they face risk of downgrades or other trouble:
• Patterson-UTI Energy (PTEN): Oil companies’ capital-spending cuts are expected to hit the revenues of offshore drillers and U.S. onshore drillers such as Patterson-UTI. The company has a high-yield rating from S&P, and its investment-grade rating from Moody’s is just two tiers above junk and comes with a negative outlook. On the bright side, Patterson doesn’t have any large debt maturities until 2022, S&P says. The stock is down 67% this year, and its 2029 bonds yield 8.5 percentage points more than Treasuries.
• Ovintiv (OVV): This North American oil and gas exploration and production company has made it onto S&P Ratings’ list of “potential fallen angels,” or investment-grade companies that could be downgraded to junk, alongside Patterson-UTI. The company’s bonds yield 7.1 to 8.2 percentage points more than Treasuries, and the stock is down 60% this year.
Write to Alexandra Scaggs at [email protected]