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Debt cliff is not looming for Appalachia's shale gas drillers

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Debt cliff is not looming for Appalachia's shale gas drillers

Appalachian shale gas producers are not facing a wall of debt in need of refinancing, after slashing spending and using assets sales to pay off loans in recent years.

Accustomed to low commodity prices, the region's pure-play shale gas drillers largely avoided their heavy borrowing that their more oil-focused peers took on over 2012-2014, analysts at S&P Global Ratings wrote back in January. During those years, peaking oil prices inspired many companies to issue or refinance debt, much of which is soon coming due, the analysts noted.

"Over the short to medium term (2019-2024), the oil and gas sector has a significant amount of debt maturing," the analysts wrote. "This is particularly evident among weakest links, with $17.5 billion of debt set to mature between 2019 and 2022, of which nearly 85% is within the oil and gas exploration sector."

But Appalachian producers, stuck with their shale gas trading consistently just under $3/MMBtu, did not try to take on ambitious borrowing. As a result, most of the top 10 Appalachian shale producers have healthy amounts of credit remaining on their revolvers, disciplined spending habits reined in by the market's demand for positive cash flows, and no need to refinance long-term debt in the next two years, an S&P Global Market Intelligence analysis found.

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Oil and gas analyst Brian Gibbons with credit research firm CreditSights said that new loans for to the high-yield — or less-than-investment grade — companies in the sector will be down by 29% in 2019 compared to the year before, having weakened in the last two quarters. "We continue to anticipate issuance slows for the second straight year in 2019 on the back of light remaining maturity schedule, flat-to-lower M&A activity overall, and companies hunkering down with what we expect will be a weaker oil price environment and tighter capital markets access," CreditSights said April 4.

EQT Corp., the nation's largest gas producer by volume, has the most debt to refinance in the next two years. Protected by an investment grade credit rating, however, the producer should not struggle to find lenders. The bulk of Appalachia's exploration and production companies, or E&Ps, such as Antero Resources Corp. and Southwestern Energy Co., have strong high-yield grade ratings, little need to refinance existing debt and room left on their lines of credit. Smaller producers such as Utica Shale drillers Gulfport Energy Corp. and Montage Resources Corp. have middling credit ratings but some open lines of credit and no refinancing needs through 2020.

Southwestern is a prime example of a producer using asset sales and spin-offs to scale back its debt while sending money back to shareholders. Southwestern sold off its Fayetteville Shale operations in Arkansas and used the $1.65 billion in proceeds to pay down its line of credit and retire some long-term debt while initiating $200 million in share buybacks. With a cleaned up balance sheet and its net debt-to-EBITDA ratio below the market target of 2.0 times, the company has said it is using the remaining cash to finance its upfront costs in Pennsylvania targeting both dry gas and liquids in the Marcellus Shale.

"Appalachian companies are in a footrace to lower leverage to below 2.0x debt/EBITDA, maximize free cash flows, and enact a return-of-capital program," veteran shale gas analyst Subash Chandra with Guggenheim Securities LLC said of Range Resources Corp. on April 2. "[Range] is a turn or so behind others in the peer group with asset sales as the primary way to catch up. With leverage over 3.0x, management has indicated a willingness to monetize anything other than their core Washington County [Pa.] acreage."

While Appalachia's slew of public and private drillers may seems ripe for consolidation, the emphasis on spending discipline and an unwillingness to take on more debt likely will put the brakes on M&A activity, Williams Capital Group LP analyst Gabriele Sorbara told his clients March 20.

"With activity mostly slowing down in the sector, we would expect reduced levels of capital markets and M&A activity in 2019; although consolidation will remain integral to the sector," Sorbara wrote. "Overall, management teams are razor-focused on a path to begin or to accelerate the return of cash back to shareholders via buybacks, dividends and/or reduce leverage via debt reductions." Sorbara said investors will not return to shale until company managements demonstrate they can stick to their spending plans and consistently send cash back to shareholders.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.