Range Resources rushed to refinance its debt at the start of this year, taking advantage of a rally in oil prices and renewed investor demand for junk-rated energy bonds. Despite the favourable backdrop, the gas-focused driller based in Fort Worth, Texas, still had to pay up to raise fresh cash, selling $55om of debt with an interest rate of 9.25 per cent. It wanted to replace bonds that were due to expire in the next couple of years but carried a much lower coupon, below 6 percent.
For Range, it seems to have been smart to grab the money when it was available. After just two weeks of trading, and with energy prices floundering, the new bond has dropped to 92 cents on the dollar, pushing its yield above 10 per cent and into territory normally recognised as “distressed”. Range is not an isolated example. A $6oom bond maturing in 2025 sold by Tulsa, Oklahoma-based Laredo Petroleum slipped to 98 cents on the dollar in its first day of trading last week, and has sunk to 93 cents on the dollar since. EQT Corporation of Pittsburgh has seen its new $75om bond maturing in 2030 drop to 90 cents on the dollar.
For investors who lapped up the debt, it is a reminder of the risks implied in those higher returns. Of course, if fund managers already own the bonds of these companies, they have an incentive to keep lending to avoid default. But for the rest it is probably a sign of the excesses abounding in a world with more than $12tn of negative yielding debt, where the opportunity to earn closer to 10 per cent by investing in a struggling US oil and gas company is hard to turn down.
Global oil prices had rallied at the end of the year due to announcements of cuts in production, followed by a boost in early January due to tensions in the Middle East. That set the scene for a modest rebound for some struggling companies in the sector. But Brent crude is now down almost 17 per cent from its early January peak, while US natural gas prices are also under pressure due to a mild winter. That is prompting a lot of investors to consider deeper, longer-term challenges for producers and refiners. Some analysts warn that too many companies in the oil and gas sector have unsustainable balance sheets, weighed down by too much debt.