Sinking oil prices are turning distressed U.S. energy companies into takeover targets for opportunistic private investors who are prepared to offer expensive debt in return for ownership stakes, as the sector struggles to access traditional forms of bank financing.
A slowing global economy and fears of excess oil supply sent the benchmark crude oil index spiraling to as low as $53 in October from a 14-year high of $86 earlier that month. Brent Crude was $58.18 on Jan. 8.
High operating costs have also reduced oil and gas companies’ margins and free cash flow, which is restricting access to loan financing as banks’ credit committees are wary of increasing their exposure to the volatile sector.
“Oil and gas needs other sources of capital because traditional providers are less interested,” according to Reid Morrison, a partner and global energy advisor at financial services firm PwC. “But these other sources, like private equity, come at higher terms.”
Gastar Exploration Inc., drilling services provider Parker Drilling Co. and Waypoint Leasing Holdings Ltd., which provides oil and gas helicopter operations, all filed for Chapter 11 bankruptcy protection in the fourth quarter of 2018.
All three companies lined up debtor-in-possession (DIP) loans and reduced debt in return for new ownership structures in a bid to keep operating. Waypoint and Gastar obtained commitments from private investors.
Australian firm Macquarie Group Ltd. agreed to buy Waypoint out of bankruptcy for roughly $650 million in December. In October, Gastar’s largest shareholder, Ares Management Corp. (NYSE: ARES), provided $100 million of a $383.9 million DIP facility to back its restructuring.
Gastar is paying 750 basis points over Libor for the first 90 days of the maturity of its DIP loan with Ares, which then rises to 1,000 basis points over Libor. The private equity firm will also assume control of the company, and is shopping Gastar’s assets to the highest bidder, two sources in the oil and gas sector said.
Parker Drilling will pay 400 basis points over Libor, plus fees, for a $50 million DIP loan from Bank of America Merrill Lynch and Deutsche Bank, according to documents filed with the U.S. Bankruptcy Court for the Southern District of Texas, Houston division.
Citing volatility in the sector, Parker Drilling asked the court to speed up the approval of its proposed DIP loan on Dec. 30, according to David Cunningham, a managing director with Moelis & Co., which is advising Parker Drilling throughout its bankruptcy.
“No party was willing to provide financing to [Parker Drilling] on an unsecured basis,” Cunningham said in a court document, adding that their reasoning “centered on an unwillingness to lend to, and increase exposure to, the oil and gas sector.”
Parker Drilling filed for bankruptcy on Dec. 12. The company could trim roughly $375 million in unsecured debt through a debt-for-equity swap, issue $200 million in new money, and raise $95 million through an equity rights offering.
While smaller energy companies may struggle to obtain large bank loans, their provision of crucial ancillary services in the oil and gas world is not lost on private investors with deep pockets. In their current distressed states, these companies are ripe for takeover.
“Private equity is a significant player in the oil and gas space and they have access to capital,” said Joe Dunleavy, a partner alongside Morrison at PwC’s energy business. “Private equity firms also have strong enough balance sheets to acquire these distressed companies.”
The company also said it expects to generate substantial free cash flow in 2018, allowing it to initiate a dividend in the first-quarter of 2019.
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