06 August 2018, News Wires — Private equity firm KKR and energy infrastructure company Williams’ US$1.2bn purchase of natural gas and oil processing and transporting company Discovery Midstream has added fuel to thriving oil and gas lending, only two years after low oil prices made the sector a no-go area.
Leveraged loan issuance in the oil and gas industry has more than doubled in the first half of 2018 compared to a year earlier as higher oil prices have stimulated M&A activity.
Oil and gas issuers lined up US$62.9bn of leveraged loans during the first half, 106% higher than US$30.5bn in the first half of 2017, according to Thomson LPC data.
The price of a barrel of oil dropped to approximately US$30 in 2016, virtually freezing financing for the sector as investors stopped lending to companies that could not produce oil at a profit, many of which entered debt restructuring.
The recovery in the oil price to its current level of around US$70 per barrel has driven the current surge in M&A activity along with lower default rates, which are expected to fall to 11% after hitting 17.5% in 2017, according to Fitch Ratings.
“A commodity is a commodity,” said a loan investor. “They are going to go up and down. Right now oil is up, so people are interested in the debt.”
Although global oil and gas M&A has trended slightly down this year, business is booming in the US where US$120.3bn of deals were announced through August 1, up 17.9% over last year, according to Thomson Reuters Deals Intelligence.
Volume totaled US$180.6bn through August 1 globally, 2.9% lower than the same time last year.
Much of this volume has been fueled by private equity firms flush with cash after years of fundraising. Half of the announced acquisitions are due to sponsor activity, an energy banker said.
Factors driving this interest include low interest rates compared to historical prices, abundant institutional liquidity, and the fact that public markets are unattractive from a yield perspective, the banker said.
The KKR-Williams purchase of Discovery Midstream, a natural gas and oil processing and transporting company, was announced on July 30 after several energy buyouts were successfully financed in the US leveraged loan market.
Natural gas company Midcoast Operating LP priced a US$600m term loan in late June backing its buyout by private equity firm ArcLight Capital Partners at 550bp over Libor.
Natural gas and crude oil midstream company Brazos Midstream lined up a US$950m loan supporting its buyout by Morgan Stanley Infrastructure Partners at 400bp over Libor in May.
In another potential deal, Reuters reported July 24 that Occidental Petroleum Corp is looking to sell its pipeline assets for more than US$5bn.
Oil prices are above the price that most companies need to break even on a barrel of oil, which implies improving credit conditions, said Mark Sadeghian, senior director of energy at Fitch Ratings.
The rise in oil prices can be attributed to synchronized global GDP growth combined with lower inventory due to OPEC capacities as well as specific supply problems in countries such as Venezuela, Libya and Iran, he said.
This is bringing new interest in M&A activity, which can be good for oil and gas companies from a credit perspective, as long as leverage levels do not rise significantly.
“Generally speaking, size and scale is a credit positive,” Sadeghian said. “Bulking up can move you down the efficiency curve faster. A lot of companies could potentially benefit from combining, and if the financing was neutral it could potentially be helpful from a credit standpoint.”