Capital raising by US oil exploration and production companies has fallen sharply following the decline in crude prices that began last October, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity. Companies in the sector have not held a single bond sale since the start of November, according to Dealogic, while share sales have also slowed.
The data suggest that after a record-breaking boom in US oil output in 2018, growth will be weaker this year. The government’s Energy Information Administration has forecast that between December 2018 and December 2019, US crude production will rise by about 500,000 barrels a day. That would represent a sharp slowdown from growth of 1.8m b/d over the previous 12 months. The US shale industry has relied heavily on debt to finance its growth, with exploration and production companies raising about $300bn from bond issuance over the past 10 years. As crude prices started to slide last October, that source of capital was choked off, with just three bond sales by exploration companies that month, and none at all since November, according to Dealogic.
US benchmark crude dropped from a peak of about $76 a barrel in early October to about $42 at Christmas, before recovering to about $53 this week. Ken Monaghan, co-head of high yield at Amundi Pioneer, the fund management group, said the rise in exploration and production companies’ debt yields had put off potential borrowers, with spreads over US Treasury bonds climbing from 3.9 to 7.5 percentage points at their peak before settling back to about 5.9 percentage points this year. “No one wanted to issue debt unless they had to,” Mr Monaghan said. “At the peak, they would have been looking at yields of about 10.25 percent. That’s awfully expensive.”
Henry Peabody of Eaton Vance, another fund management group, said that for the time being debt and equity investors were aligned in encouraging oil producers to pursue cash generation rather than borrowing more to pursue growth. “No one wants to get caught out over their skis,” he said. Weak share prices have also been a deterrent to capital raising.
Share issuance by exploration and production companies has slowed sharply, with just $157m raised from equity sales in the past four months as the S&P oil and gas exploration and production sector index has fallen 29 per cent since October. There has not been an initial public offering of an oil and gas company for more than a year, and companies that were looking at possible flotations are expected to wait for markets to recover. “We have a great IPO backlog, but not much IPO activity,” said Osmar Abib, co-head of energy at Credit Suisse. “We are getting ready, but owners are not going to go out at a substantial discount and give away value.”