A hangover energy can’t get rid of

Since commodity markets tanked in 2014, some oil and gas exploration and production companies are faring better, but some still have debt-burdened balance sheets.

Despite something resembling a recovery – or at least stabilisation – of oil prices, some energy companies continue to have a hard time, including many private equity-backed outfits.

In early March, The Jordan Company-backed Harvey Gulf International filed a Chapter 11 petition in a Houston bankruptcy court, a jurisdiction that has seen its share of oil and gas companies seek court protection as a result of the commodity market rout.

The New Orleans-based offshore vessel and marine support provider, which listed between $1 billion and $10 billion in assets and liabilities, plans to slash $1 billion by converting secured debt to equity. Harvey Gulf’s creditors include Metropolitan West Funds, which is part of TCW; Nuveen Investments; and THL Credit Senior Loan Fund. The Jordan Company bought Harvey Gulf for $500 million in August 2008.

THL and Metropolitan declined to comment. Harvey Gulf, Nuveen and The Jordan Company couldn’t be reached for comment.

The offshore portion of the energy industry is in a bleaker position than other portions of the sector.

“The credit profile of exploration and production (E&P) companies have gotten better with oil prices. Offshore contract drilling and services is a totally different story, which we think is still going to be weak into 2019,” says Paul Harvey, a director in S&P Global’s oil and gas ratings group. “The offshore activity just started to dwindle at the time they were bringing more rigs into the supply and oil prices began to fall.”

Harvey Gulf chairman and chief executive Shane Guidry alludes to such market conditions in its first-day declaration attesting to Harvey Gulf’s initial court filings and its financial condition.

As oil prices dropped precipitously in 2014, E&P companies “drastically cut” the number of offshore exploration and drilling projects, leading to, among other things, he says, a “considerable vessel oversupply”. The supply-demand imbalance granted E&P companies “substantial pricing power”.

S&P’s Harvey notes the ratings agency expects the price per barrel of WTI crude oil will be $55 for 2018. While it’s not the $100-plus levels before commodity prices fell through the floor, it’s certainly a marked improvement from the below-$30 prices at the market’s nadir.

The outlook is a little better for E&P companies, but times are still tough for some such companies. First Reserve-backed Ascent Resources Marcellus Holdings and Riverstone Holdings-backed Fieldwood Energy are two E&P companies that also filed Chapter 11 cases this year. Ascent declined to comment, while Fieldwood could not be reached for comment.

Riverstone declined to comment, while First Reserve could not be reached for comment.

Multiple FS Investment BDCs were second lien lenders for both companies, but PDI understands the vehicles have since exited. FS also declined to comment. Other BDCs have cut their energy exposure as well over the past couple years.

“I think there were still some [E&P] companies that, for whatever reason, never really recovered from 2016,” S&P’s Harvey said. “They’ve just had very high debt balances and the cash flows never got back to where they were supposed to be.”

Fieldwood’s chief executive G.M. McCarroll noted in his first-day declaration filed with the court it suffered from such a fate. Despite the company’s cost-cutting efforts and rebound in oil prices, Fieldwood saw its “revenue and cash flow generating capacity would not be sufficient” to service debt and remain a viable business.

Ascent’s general counsel Robert Kelly nodded to a similar sentiment in his first-day declaration: Even after accounting for the “recent uptick” in oil and gas prices, Ascent’s revenue from product sales wasn’t enough to meet its expenses and its output wasn’t enough to meet “contractual obligations”.

While at least a portion of the sector may be on more solid ground – or at least not as rocky – Harvey notes in a research note that a wall of debt maturities through 2019 may cause some lenders to pull back, possibly leading to tighter liquidity markets again. More than $71 billion will come due next year, according to the note.