W&T Offshore’s proposed second lien bond aims to win over offshore drilling skeptics with a double-digit yield and a pitch that the energy space at large is poised for a bull run, according to nine buysiders following the deal.

Led by Morgan Stanley, the USD 625m second lien offering due 2023 is expected to roadshow through Thursday (4 September), pricing thereafter.

Whispered in the 10% area, the bond effectively repays and retires all existing debt, according to deal documents—although in addition to the new bond, W&T will draw roughly USD 32m from its USD 250m revolver due 2022.

“In an environment where we are starving for yield, some managers are definitely reaching into the energy sector in the hope of getting a yield kicker,” one buysider said.

Pro forma the new bond deal, W&T’s leverage totals around 2.2x based on total pro forma debt of USD 657.3m and USD 300.5m in adjusted EBITDA booked over the LTM period ended 30 June, according to deal documents. Liquidity stands at USD 233m, with USD 208m of availability on its revolver due 2022 and USD 25m in cash, according to deal documents.

By taking out near-term maturities W&T – the company has USD 536m in bond debt due between 2019 and 2021 now up for tender — will allow management the wherewithal to focus resources on increased production across existing and new reserves, two buysiders said.

The company expects to receive 30% of the revenues from a recently entered JV Drilling Program for 14 identified drilling projects in the Gulf of Mexico over the next three years, according to company documents. The company also recently sold its ownership in a non-core asset in the Permian for USD 56.8m.

Conservatively assuming adjusted EBITDA remains flat at USD 300.5m, the company should generate roughly USD 142.5m of cash (21.7% of total debt) in 2018, based on capex expected at roughly USD 95m and USD 63m of total pro forma interest expense, sources said.

Crude awakening

W&T joins the list of energy players including services company Basic Energy along with E&P’s such as Chesapeake Energy and Vine Oil & Gas that have successfully tapped the market as crude prices reach their highest since late 2014.

WTI crude was last quoted at USD 76.07 per barrel, up 117% from its lowest point in 2016 at USD 34.99. Brent crude was last quoted at USD 85.77 per barrel, up 150% from its lowest point in 2016 at USD 34.37.

“It makes sense for these issuers to come to market given positive momentum on crude,” one of the buysiders said. “All of these issuers are supported by better sentiment around commodity prices. And after the 2015 and 2016 debacle, a lot of them are coming back with cleaner balance sheets.”

However, with the crude price downturn not too far in the rearview, some investors are hesitant to jump back into the volatile sector at large. “Offshore is an acquired taste. Oil prices are up, but people still think that the offshore part of the E&P industry is out of favor. They’re afraid of being burned like they were in 2016,” one buysider said.

Offshore producers face weather implications as well, another buysider pointed out. “All it takes is one hurricane or Macondo-type event and a company can be done,” he said.

W&T was able to survive the sector crash by deploying through a number of operational and financial strategies, including a distressed exchange in 2016.

The capital structure has rallied this year, but the new bond is still expected to be priced expensively, and come wide to better capitalized peer shelf producers Talos Production and EnVen Energy Ventures, sources said.

Gulf of Mexico-focused EnVen has over 2x PDP coverage and an expected FY18 leverage of 1.1x, compared to W&T’s 1.3x PDP coverage and pro forma 2.2x leverage, two sources said. Talon’s PDP coverage at 31 December was 1.1x and FY18 leverage is expected to come in near 1.2x, the sources added.

W&T also estimated as of 31 December 2017 that 50% of its total proved reserves will be depleted within three years, according to deal documents. “If they go through with their projected drilling programs, then good for me. If not, buysiders have to factor that risk into the pricing as well,” one buysider said.

W&T’s USD 189m 8.5% senior unsecured notes due 2019 last traded on Thursday (27 September) at 99.688 to yield 8.933% compared to trades in the 10/11 context in early 2016 before the exchange and when the principle amount of the bond was USD 900m, according to MarketAxess. The company’s shares traded today at USD 9.63 for a market cap of USD 1.34bn, up 394% from USD 1.95 a year ago and up 598% from USD 1.38 in 2016.

Talos’s USD 390.9m 11% senior secured notes due 2022 last traded on Friday (28 September) at 107.5 to yield 7.182%, according to MarketAxess. EnVen’s USD 325m 11% second lien notes due 2023 last traded yesterday (2 October) at 110.75 to yield 7.33%, according to MarketAxess.

Morgan Stanley declined to comment. W&T did not respond to a request for comment.

2018 Debtwire