The mounting troubles for cash-strapped oil and gas companies and their lenders is about to get much worse, a trio of distressed investing and financing experts said on Monday, but it could be a buying opportunity for strategic distressed debt investors.
Oil and gas companies are facing a slew of headwinds: stagnant commodity prices, along with supply, transportation and geopolitical challenges. This has given way to a rising number of out-of-court recapitalizations, formal bankruptcy cases, and the closing of debt and equity windows to oil and gas and oilfield service companies.
A massive load of high yield debt coming due in the next few years was one of the main topics on a panel entitled "Crisis in the Oilpatch — Danger or Opportunity for Lenders and Distressed Investors?" at annual the Distressed Investing Conference.
The industry is facing a wall of maturities that will start to hit in the second quarter of 2021, according to Todd Dittman of the privately-held alternative investment firm Angelo Gordon.
Dittman added that he had never seen an industry more hated in his 28 years working in the energy finance space.
"Every major source of capital is gone," said Dittman, who is the head of energy at Angelo Gordon. "We're finding out how important liquidity was to the shale bubble and I think it was turning out to be vital."
The wall of debt, along with stagnant commodity prices, could result in "significant losses" for reserve-based lenders, said Elena Robciuc, managing director of Societe Generale's energy group.
"Essentially, the reserve-based lenders are becoming the last resort financier for the industry and that is not the role they are intended to serve," Robciuc said at the conference hosted by the Beard Group at the Harmonie Club in Manhattan.
Robert Albergotti, a Houston-based managing director at AlixPartners, said coming out of the last cycle, a lot of the oil and gas companies that had cleaned up their books had done so on the hypothesis of crude oil prices between $65 to $75 per barrel.
With crude oil prices hovering below that range, right now it's trading at $55 per barrel, the $5 to $10 difference is having a significant impact on a lot of companies.
"These companies are extremely capital intensive … the drain on cash flow is quite extreme and we come in and help make the hard decision to shut down rigs or not," Albergotti said about his role when a call comes in from an oil and gas company experiencing financial troubles.
While these conditions are difficult for incumbent lenders, note holders and equity investors, there are investing opportunities for strategic buyers with patient capital.
"Invest well within established cash flow, [with] a reversion to pre-2008 mindset, [use] a value approach," the last slide in Dittman's presentation stated.
Dittman thinks private equity investors should buy PDP, or proved developed producing reserves, at cheap prices, lever modestly, and hedge. PDP is the oil and gas that the borrower is actually producing from its operations and provides cash flow to the borrower, as defined by the Federal Reserve.
For distressed investors, he suggests buying unimpaired secured tranches at discounts and amortize prior to maturity through sweeps and asset sales.
Lastly, for non-bank lenders, Dittman says the best bet is to make PDP-covered loans, amortize and hedge on oil and gas prices.