A Jan. 2 U.S. airstrike in Baghdad provided North American oil and gas companies with a brief window for opportunistic debt offerings to start out 2020, a number of energy industry credit analysts said.
After Qassem Soleimani, a general who headed the Islamic Revolutionary Guard Corps' elite Quds Force, was killed at the Baghdad International Airport, West Texas Intermediate crude rose 3% to settle at $63.05 per barrel and edged slightly higher Jan. 6 before finishing the week at $59.04. That short spike created an opening for several midstream and upstream companies to issue senior notes, according to CreditSights analyst Charles Johnston.
"I certainly think the geopolitical tensions with Iran that drove oil prices up and the flight-to-safety that drove bond yields down provided a nice early-year window of opportunity for any energy names with near-term plans to tap the markets. It looks like that window has largely closed," Johnston said in an interview. "Crude prices are back down below where they were a month ago, and yields have largely returned to right where they were a month ago."
When oil prices are higher, lenders are more likely to give loans to producers and pipeline companies because the return on investment looks more attractive. The flight to safety — investors' move from riskier equities to safer bonds — was driven in this case by market concerns, including the prospect of war, Johnston added.
Pipeline companies Energy Transfer LP, Enterprise Products Partners LP, Western Midstream Partners LP, Genesis Energy LP and Pembina Pipeline Corp. all issued offerings during the week of Jan. 6, as did drillers such as WPX Energy Inc. and troubled upstream companies Range Resources Corp. and Laredo Petroleum Inc.
"I view this as pretty remarkable because with the exception of WPX, these [upstream] companies have the balance sheets of a college kid without a job. If you add all their ratings together, you barely get to investment grade," Tortoise Capital Advisors LLC portfolio manager Matt Sallee said in a Jan. 13 podcast.
Fitch Ratings senior director Thomas Brownsword noted in an interview that the bond issuances should help reassure investors that companies will be able to refinance notes in 2021 and 2022.
The recent rush to tap markets was reminiscent of Kinder Morgan Inc.'s record IPO in February 2011 amid a series of popular uprisings that toppled governments across the Middle East and North Africa, Brownsword added.
"Voila, Kinder Morgan decides it's time to undo the [leveraged buyout] and go public. ... when the Arab Spring got everyone thinking oil could go 25% higher," Brownsword said. "They chose their time after three or four years of being private to start tapping markets again."
A group of management members and private equity investors had taken the pipeline giant private in 2006.
However, S&P Global Ratings' analyst Michael Grande said in an interview that the recent "flurry" of midstream offerings is more a result of "pent up demand after companies sat on the sidelines at the end of last year."
"I think companies would have done this regardless," Grande said, pointing to Energy Transfer's need to de-risk its acquisition of SemGroup Corp. and the $3 billion short-term loan facility Western Midstream used to finance asset drop-downs from Anadarko Petroleum Corp.