Bond Vigilantes Push $258 Billion of Oil Debt Past Junk

They have sold off hundreds of oil fields, eliminated thousands of jobs and slashed millions of dollars from capital spending and dividends.

But in this unforgiving new world of $30-a-barrel oil, it’s barely been enough.

As U.S. oil executives from Anadarko Petroleum Corp. to Hess Corp. take drastic measures to weather the worst slump in a generation and cling to their debt ratings, creditors are already writing some of them off. So much so that late last month, average borrowing costs for energy bonds with the lowest investment grades -- issues totaling $258 billion -- soared past those of the highest-rated U.S. junk borrowers for the first time. What’s more, debt issuance industry wide has all but ground to a halt after a record year in 2015.

Today’s cost-cutting may reduce excess crude supply and help oil recover in the years ahead, but a big question remains for leaders gathered in Houston at the IHS CERAWeek conference this week: Who will ultimately survive?

“Between falling demand and the geopolitical game of chicken, forecasting the path of oil companies has become extremely cloudy,” said Matthew Duch, a money manager at Calvert Investments Inc., which oversees $12 billion. Even an investment-grade producer “with the best of intentions can still just run out of room to move and run out of time. Things could get very bad.”

Saudi Arabia’s oil minister threw down the gauntlet at the industry confab by ruling out production cuts and challenging many of those very same leaders in Houston to “lower costs, borrow money or liquidate.” And with a wave of bankruptcies already ravaging the U.S. shale industry, Hess Chief Executive Officer John Hess warned “contagion” in the high-yield debt market is spreading to investment-grade producers as financing dries up.

Last year, investment-grade energy companies were still able to borrow with relative ease in the debt markets, even as U.S. energy producers posted losses of more than $15 billion and demand for junk-rated oil debt collapsed.

In 2016, it’s gotten a lot more expensive for everyone in the industry as the global economy falters. Not a single energy company has sold bonds this month, data compiled by Bloomberg show.

A big reason has to do with the unprecedented jump in financing costs afflicting companies including Anadarko, Devon Energy Corp. and Hess, which reflects deepening worries over the health of the cost-intensive industry as companies continue to lose money on every barrel of oil they produce.

Already deeply indebted, the loss of revenue from the oil glut has caused net debt at U.S. energy companies to more than quadruple in the past year to a record 8 times earnings before interest, taxes, depreciation and amortization.

That’s increased the focus on the weaker investment-grade producers. Yields on U.S. energy bonds with triple-B ratings -- the lowest tier above junk -- have almost doubled since oil last traded at more than $100 in June 2014, to an average 7.3 percent.

In many cases, they haven’t. Within the past 10 days, eight energy companies including Anadarko, Devon, Hess and Murphy Oil, lost their investment grades from Moody’s Investor Service, which said the slump in oil will hamper the industry’s ability to generate cash flow “for several years.” The downgrades came after many of the companies already cut payouts, sold shares or reduced spending.

While those four producers still have investment grades from Standard & Poor’s, the latter two had their ratings cut to the cusp of junk in early February because of increased levels of indebtedness.

Nevertheless, industry executives are putting on a brave face as their companies tout aggressive goals to strengthen finances and increase flexibility.

Devon has reduced both shareholder rewards and capital spending, fired 20 percent of its workers and announced an equity sale. CEO David Hager also emphasized that there are “no sacred cows” if further revisions are needed. Roger Jenkins, Murphy Oil’s CEO, said this week the company will look at sales of assets and consider cutting dividends if oil prices stay at current levels.