Fitch: NA Upstream Firms Strategize amid Ongoing Energy Downturn
To date, exploration and production companies (E&Ps) appear to have employed two different types of strategies in managing capital structures in the downturn: some are publicly committing to material gross balance sheet deleveraging, while others are more focused on growth, choosing minimal or no debt reduction. The majority of E&Ps have fallen somewhere in between these two poles, with some level of planned debt repayment through tenders, exchanges, swaps or planned repayment as maturities come due.
However, gross debt reduction isn't the only lever E&Ps have used to help offset balance sheet risk in the downturn. Firms have instituted self-help measures, such as cuts in capex, general and administrative costs, dividends and drilling and completion cost savings, as well as equity raises, asset sales and accelerated production growth.
E&Ps that elect to manage their capital structures face additional considerations like whether or not to push a maturity wall out by targeting near-term maturities or to repurchase longer dated/higher duration debt to pick up a bigger market discount. This choice is sometimes constrained by the presence or absence of make-whole provisions, calls and the relative liquidity of different bond issuances, which can limit a company's ability to pick and choose which debt to retire.
In addition to this, some fallen angel issuers have taken advantage of unsecured bond indentures to issue secured and subsidiary-guaranteed unsecured debt in the downturn. Secured issuance has generally been constrained by net tangible assets covenants in unsecured bond indentures, while subsidiary-guaranteed unsecured debt has been enabled by the lack of guarantee restrictions. Fitch sees mid-level risk that additional natural resource issuers may issue guarantee-enhanced unsecured debt with a heightened risk among the offshore drillers.