Notes From All Over -- Energy -- Part 2 -- October 25, 2020

Consider the source: oil, natural gas industry said to be "exploiting federal relief through historic borrowing spree." Link here.  Say what? Wasn't that the intent? Whatever. Graphic pending.

The oil and natural gas industry has embarked on a lavish borrowing spree this year, underpinned by a federal bailout of corporate debt markets in response to Covid-19.

Oil and gas companies, already in dire financial straits before the pandemic, have issued $99.3 billion in debt in U.S. markets since March 23, said the report authored by nonprofit organizations Friends of the Earth, Public Citizen and BailoutWatch.

On that date, the Federal Reserve Bank, aka the Fed, announced it would purchase corporate bonds for the first time ever through a program called the Secondary Market Corporate Credit Facility (SMCCF) as an emergency measure to keep financial markets afloat amid the pandemic-driven economic downturn.

The oil and gas industry, “heavily indebted and struggling long before the coronavirus, is now benefitting substantially from the central bank’s bailout of the corporate debt markets,” researchers said.

An analysis of Securities and Exchange Commission filings and market data “reveals troubled companies, some on the brink of insolvency, exploiting the federal response to Covid-19 to secure a lifeline…The borrowing includes a wave of refinancing often resulting in later payment deadlines, substantially lower borrowing costs, or both. “In effect, the Fed is forestalling the demise of an industry that has always relied on government largesse.”

The Fed had purchased debt from 19 operators since the March announcement, researchers said. Those companies have since sold more than $60 billion in new bonds to investors, or about 60% of the debt issued during the period.

Of the 19 companies, 12 have received credit rating downgrades of their short-term debt, long-term debt, credit or default ratings since March, researchers said. These firms include onshore heavyweights EQT Corp., Marathon Oil Corp. and Continental Resources Inc.

“The first three quarters of 2020 represent the highest level of debt issuance for that period since at least 2010,” researchers said. “This surge in borrowing was made possible by the Fed’s promise to purchase large quantities of corporate debt.”

At the end of August, the Fed held an estimated $355.5 million in fossil fuel bonds, researchers said, up $40 million from July.

The bonds were issued by companies ranging from integrated majors such as ExxonMobil and BP plc, independents including Apache Corp. and Continental, and midstream operators like Enterprise Products Partners LP and Williams, the authors said.

Cimarex next? Link here.

• Cimarex Energy is a rare gainer among oil and gas producers today after jumping 7.5% yesterday, as the stock is viewed as a top takeover candidate in the consolidating U.S. shale sector. 
• Stifel analysts see Cimarex as possibly the top remaining target given its free cash flow profile and "clean" corporate structure, although the firm also considers Continental Resources and Diamondback Energy as top remaining E&P candidates for M&A deals. 
• Susquehanna analyst Biju Perincheril says combinations involving the likes of Cimarex, Marathon Oil and Apache "could make sense to lower cost structures," while Diamondback is the only remaining mid-to-large-cap pure play Permian operator. 
• Raymond James upgrades Cimarex to Outperform from Market Perform with a $35 price target, implying a roughly one-third gain from this morning's open, citing attractive free cash flow, meaningful capital efficiency gains and high gas exposure.
  

China oil imports: Brazil now #3 -- US drops to #4. Link here.  

Brazil jumped to China’s third-biggest crude oil supplier in September, import data showed on Sunday, as China’s independent refiners scooped up cheap supplies of the South American exporter’s relatively high quality oil. So, it's Saudi Arabia, Russia, Brazil, and the US. Link here for the numbers.

Filling space: this story / link is not even necessary. I've talked about it so many times before, but this page needed a few more stories to make the Sunday "notes from all over" quota. So, here it is: "Saudi Arabia is suffering the consequences of its failed oil price war." Link here.