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Junk sale buys Oxy much-needed time

US independent slices off chunk of near-term debt but ominous overhang remains an existential threat

The bankruptcy of natural gas kingpin Chesapeake Energy is a wake-up call to everyone in the US shale patch. The company’s breakneck production and acreage growth promised much but ultimately heaped up unsurmountable debts, only for the Covid-19 pandemic to hasten its downfall and claim the highest profile casualty yet.

Other big-name victims could follow in its wake, particularly if 2021 fails to reverse company fortunes. US independent Occidental Petroleum has substantial debt obligations starting to become due from next year. The company’s long-term debt maturities have grown to over $40bn following the much-critiqued Anadarko deal last year, a figure over four times higher than the one on which Chesapeake defaulted. 

And while the firm is spared sizeable debt payments this year, giving some breathing room, the tough economic conditions in 2020 have already buffeted Oxy’s finances. The producer recorded a $2.2bn net income loss in Q1 despite a $1bn gain on oil hedges, $1.2bn in cost reductions and a 50pc capex cut.

Impairment charges also increased on fears that an oil price recovery will be protracted, potentially making assets permanently uneconomic. Oxy posted $580mn for Q1, mainly in the US and Oman, but raised its Q2 forecast a further $9bn as the scale of the economic downturn became evident.

And with cases of Covid-19 infections accelerating globally, market volatility will likely restrict oil price growth at least into next year. WTI and Brent have averaged just $35.15/bl and slightly over $38/bl in 2020 compared with above $57/bl and not far from $65/bl the previous year, according to data from the US Energy Information Administration (EIA). Research consultancy Rapidan Energy Group forecasts that WTI will struggle to break $40/bl for the remainder of the year, limiting revenues and capacity to pay down debt for many producers.

Baby steps   

Oxy has taken immediate steps to help tackle the $6.4bn in looming 2021 maturities. The US indie issued $2bn in new bonds in June to repurchase a chunk of its near-term debt and delay repayment until 2025, 2027 and 2030. The bond yields were much higher than previous notes issued by the company due to credit agency Moody’s downgrading its debt rating to ‘junk’ status in March and the share price sliding by 57pc since early January.

The next priority is asset sales. Oxy is the largest US independent acreage holder, with 14.4mn net acres and assets in the Permian, the Gulf of Mexico and the Rockies. The company also has an international footprint in Algeria, Colombia, Oman and the UAE. “Paying down debt, short of a return to halcyon prices at $60/bl or better, will come from asset sales,” says Jeff Campbell, senior analyst, E&P and oil services at US brokerage Tuohy Brothers Investment Research.

Oxy plans to offload mineral interests, including oil and gas, in Wyoming but has plenty of other options from which to make. “In my opinion, every asset in the portfolio except the Permian Basin and Algeria is for sale,” says Campbell.

“Paying down debt, short of a return to halcyon prices at $60/bl or better, will come from asset sales” Campbell, Tuohy Brothers

The involvement of the Algerian government, which blocked a previously agreed deal with Total, would likely complicate a sale there. The blocks held are valued assets anyway, in Campbell’s view, producing 54,000bl/d in Q1. Divestment in the Permian would also appear unlikely given that offloading acreage would undermine the rationale of merging with Anadarko and taking on the huge debt burden in the first place.

But the problem for Oxy is twofold. Low commodity prices, weak cash flow, rampant debt and little access to capital markets for many other strained independent producers is unlikely to see a rush to Oxy’s non-core asset base. “There is no money to buy shiny new toys even if they wanted to,” warns Campbell. And value destruction in the current economic climate gives little incentive to fast-track sales against the short-term debt restructure.

But while the debt restructuring does buy the company more time to wait out the downturn, its future still depends on long-term oil price revival and stability. If the current level becomes the new normal due to the pandemic and changes to consumer behaviour, it will increasingly be difficult for oil producers with hefty debt obligations to keep deferring payments, no doubt reviving the spectre of Chesapeake.      

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