Canadian energy companies are finding a lucrative new way to fund themselves, with oil and gas producers taking advantage of ultra-cheap debt to re-finance existing bonds – and, in one case, to issue debt for the very first time.
Although the pandemic has not abated, an economic resurgence and vaccine deployment has helped the price of West Texas Intermediate oil to stabilize around US$50 a barrel. Seeing some normalcy, fixed-income investors feel comfortable betting on energy companies again, and both investment and speculative grade issuers are capitalizing on the intense demand.
Early this week, oil sands producer MEG Energy announced a US$600-million bond offering to refinance debt that pays 7-per-cent annually and comes due in 2024. The new bonds do not mature until 2029, giving a much longer runway before repayment, yet they cost the company less, yielding 5.875-per-cent annually.
While MEG’s shares are still down 35 per cent from their 2020 high, the debt deal was six-times oversubscribed, meaning there was over US$3-billion in demand, according to lead underwriter RBC Dominion Securities.
The next day, Tourmaline Oil Corp. announced its first ever debt issue, raising $250-million by selling senior unsecured notes. The new bonds come due in 2028 and cost the producer only 2.077-per-cent annually, after rating agency DBRS Ltd. gave the company an investment grade rating of “BBB.”
Both companies follow in the footsteps of oil sands giant Canadian Natural Resources Ltd., which raised $800-million in November primarily to refinance existing debt. At the time, CNRL was seen as testing the waters as yields plunged, and the bond market has only turned more lucrative in the two months since.
On Thursday, the ICE BofA U.S. High Yield index, which tracks the average yield on speculative bonds from all sectors, traded at 4.24 per cent. The index is down from 4.95 per cent around the time of the CNRL issue, and far under its pre-pandemic level of 5.02 per cent in late February.
By comparison when the 2016 energy crisis erupted, forcing many U.S. shale producers into bankruptcy and putting Canadian companies under severe stress, the High Yield index hit 10.16 per cent.
The High Yield index briefly spiked to this level again early in the pandemic, but the pressure quickly abated for most sectors as the Bank of Canada and the Federal Reserve backstopped credit markets by purchasing bonds, which helped keep yields low.
Yet the energy sector, and notably the high-yield energy sector, faced a different reality because oil prices had been so volatile. “Those credit markets were not available to the lower-rated companies,” Kent Ferguson, co-head of global energy at RBC Dominion Securities, said in an interview.
Now that oil prices have stabilized and some key economic indicators, such as retail sales, bounced back to prepandemic levels during the fall, fixed-income investors are comfortable buying into energy debt deals again. High-yield energy issuers in Canada and the U.S. have been quick to tap this demand. To date in 2021, US$33-billion of speculative debt has been issued across all sectors, and US$8-billion comes from energy.
Recent energy offerings have also included issues from Pembina Pipeline Corp. and Gibson Energy, both of which issued a type of hybrid debt with features similar to preferred shares.
While high-yield issuers arguably have the most to gain from this environment, the benefits to investment grade issuers are also compelling. Tourmaline has access to bank credit lines, but this type of debt usually comes due in two to three years. By issuing bonds to repay some bank lines, the company now has debt that doesn’t mature for seven years - at a yield that was once almost unfathomable.
“Given the very attractive current environment, including low long term interest rates and the size of our business after recent acquisitions, we felt like it was the right time to introduce some longer tenor investment grade public debt into the [capital] structure,” chief financial officer Brian Robinson wrote in an e-mail.
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