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Is Saudi Arabia on the verge of winning the war on US Shale firms? It appears the spigot of malinvestment-subsidizing liquidity that kept numerous zombie energy firms alive has been shut off almost entirely. As oil prices return to cycle lows, so credit risk has spiked to record highs and issuance of life-giving bonds has collapsed. As Reuters reports, this has opened up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as many oil companies need cash to replenish banks' slimmed-down lending facilities, service their bonds and finance drilling of new wells to keep pumping oil and sustain cash flow.
Credit risk has soared back to record levels...
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As public market demand for this sector has collapsed...
Related: The “Thin Green Line” Holding Back U.S. Energy Exports
Throughout much of the crude market rout that started in mid-2014 oil firms could rely on generous capital markets investors betting on a quick recovery in prices, which made any asset sales look unattractive. But since crude prices began tanking again in early July after a partial three-month recovery, oil firms have finally started to feel the squeeze.
A torrent of $44 billion in high-yield debt and share sales in the first half of this year has slowed to a trickle with oil now at just above $42 a barrel, 30 percent below its June levels and 60 percent down from June 2014, CLc1 and a more pessimistic view taking hold that global oversupply could keep oil cheap for years.
The number of high-yield bond and share issues has tumbled more than two-thirds from levels seen in May, Thomson Reuters data show.
That opens up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as many oil companies need cash to replenish banks' slimmed-down lending facilities, service their bonds and finance drilling of new wells to keep pumping oil and sustain cash flow.
“The capital markets showed up in force in the first quarter much to everyone's surprise," said Carl Tricoli, managing partner at Denham Capital, a private equity fund in Houston.
"It didn't solve people's problems, so now when you roll to 2016 ...there will be an opportunity for private equity-backed companies with plenty of capital in place to go out and start buying."
On Monday, shale producer Magnum Hunter Resources Corp. (MHR.N) said it would get an unnamed private equity fund to pay for up to $430 million of drilling work in Ohio in return for rights to the land.
Dealmakers say potential sellers of oilfield assets are now discussing bids they would have rejected a few months ago while the changed outlook for oil allows buyers to adjust bids down.
But hope is fading as Bill Conway, co-CEO of The Carlyle Group, a giant in alternative funding, struck a cautious tone...
"I would say, this is a good time to be careful when it comes to investing in energy."
Perhaps that explains this divergence...
Related: Better Times Ahead For Oil, If You Can Believe It
Charts: Bloomberg and Reuters
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Except investors seem not to realize that the PE shops will only deal at much lower prices - which is what the credit market already implies.
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