Oil & gas bonds weaken again amid oil and US-China volatility; Diamond Offshore reports 2Q19 revenue weakness – Mid-Day Commentary

The energy sector weakened further today as oil sold off against the backdrop of tense U.S.-China trade relations and a weak equity market, according to multiple high yield traders and buysiders.

Last week, President Trump said that U.S. will place additional tariffs on goods coming into the U.S. from China, which is separate from a 25% tariff previously placed on other goods. The President also reiterated his intentions to tax the Chinese government until a trade agreement is reached, speaking at a campaign rally in Cincinnati, Ohio last week, according to news reportsIn response, the Chinese government let its currency, the yuan, fall to the weakest level in more than a decade and asked state-owned companies to suspend imports of U.S. agricultural products.

In reaction to the news, WTI crude fell 1.6% today from Friday’s close to USD 54.77 per barrel, while Brent crude fell 2.21% from Friday to USD 60.52 per barrel. The Dow Jones Industrial Average also shed 590 points today or 2.23% from Friday’s close.

“[The tariffs] obviously [lead to] lower growth, leading to lower demand, which is negative for commodities, especially oil,” one of the sources said.

Bonds backing oil and gas producers and servicers shed several points, especially those of issuers already dealing with high leverage or constrained cash flow.

Denbury Resources’ USD 615m 9% second lien notes due 2021 traded today at 86.5 to yield 18.22%, down four points from 90.5 yielding 15.29% on Friday (2 August).

Southwestern Energy’s USD 927m 4.95% senior unsecured notes due 2025 fell today to 83.75 to yield 10.148%, down almost three points from 86.5 to yield 9.42% on Friday.

Chesapeake Energy’s USD 1.3bn 8% senior unsecured notes due 2027 fell today to 72.5 to yield 13.85%, down three points from 75.5 yielding 13.08% on Friday.

Antero Resources’ USD 750m 5.625% senior unsecured notes due 2023 traded today at 89.87 to yield 8.8%, down two points from 92 to yield 8.1% on Friday.

Range Resources’ USD 750m 4.875% senior unsecured notes due 2025 fell to trade today at 78.813 to yield 9.76%, down two and a half points from 81.375 to yield 9.09% on Friday.

Whiting Petroleum bonds declined further this week after reporting lackluster earnings last week. The USD 1bn 6.625% senior unsecured notes due 2026 fell today to 84 to yield 10.06%, down almost two points from 85.75 yielding 9.65% on Friday.

California Resources’ USD 2.05bn 8% second lien notes due 2022 fell today to 59 to yield 27.44%, down three points from 62 yielding 25.49% on Friday, also following declines exacerbated by its earnings last week.

Oilfield servicers Nabors and Valaris (fka Ensco) also weakened by several points today on the shaky oil environment. Nabors’ USD 586m 5.5% senior unsecured notes due 2023 fell today to 89.5 to yield 9.12%, down four points from 93.5 on 7.68% on 31 July. Valaris’s USD 1bn 7.75% senior unsecured notes due 2026 fell today to 64 to yield 17.17%, down more than four points from 68.688 yielding 15.59% on Friday.

“If the E&Ps are going to cut back on production because of the general oil environment, then the servicers won’t have as much business, so they’re on the ropes too,” one of the sources said.

The selloff hit Diamond Offshore even harder, coming on the heels of the offshore driller’s disappointing 2Q19 earnings report released this morning, three of the sources said.

Diamond reported revenue of USD 216.7m, down 19% year-over-year from USD 268.9m in 2Q18. The results also came in on the low end of street expectations of USD 217m-USD 277m. The company missed adjusted EPS estimates, reporting a loss of USD 99 cents per share, while the market expected a loss of 90 cents per share.

Diamond’s USD 500m 7.875% senior unsecured notes due 2025 fell more than seven points to 86 to yield 11.126 from trades at 93.5 to yield 9.308% on Friday (2 August), according to MarketAxess.

The company’s stock traded today at USD 6.18 per share and a market cap of USD 971m, down 16.53% from Friday’s close.

2019 Debtwire

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