Breitburn Energy Partners LP (NASDAQ: BBEP), the oil and gas producer that canceled a bond deal three months ago, may try again to raise debt to pay down its $2.5 billion credit line, Bloomberg reported Jan. 13.
Tumbling crude prices mean it won’t come cheap.
The company is considering tapping the loan market as it faces a potential reduction of the credit line when its ability to borrow, based partly on the value of its reserves, is reset in April, according to Jim Jackson, Breitburn’s CFO.
Borrowing costs are soaring for high-yield energy companies as U.S. oil prices extend their slide after a 46% drop last year. Crude fell on Jan. 13 to $45.51 a barrel (bbl), down about 15% in 2015. Los Angeles-based Breitburn attempted in October to raise $400 million of notes to pay down its credit line, but pulled the offering amid volatile credit markets, according to a person with knowledge of the financing effort at the time.
“The traditional high-yield energy market isn’t very active—that market remains challenged so the term-loan market would be the logical place for us to be considering,” Jackson said in a phone interview.
If the credit line is reduced to below what’s already been borrowed, “we would have six months to close that gap,” he said. “We’re being very pro-active.”
Energy Yields
Yields for speculative-grade energy borrowers were an average 9.6% on Jan. 12 after reaching a more-than five- year high of 10.4% in December, according to a Bank of America Merrill Lynch index. The junk-bond yields have climbed from 5.7% in June.
Breitburn’s $850 million of 7.875% unsecured bonds due in 2020 have tumbled to 74.5 cents on the dollar from 102 cents on Oct. 7, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 13.5%.
Breitburn said Jan. 2 that it would evaluate public and private markets to raise capital in order to reduce borrowings under its credit line before the April reset.
It’s about 88% drawn so just a 10% cutback could prompt Breitburn to raise money to repay borrowings, according to a research note today from Bloomberg Intelligence analyst Spencer Cutter.
“The second-lien loan market is a financing avenue that a lot of these companies may explore,” Cutter said in a phone interview.
‘Early Discussions’
Yields on new first-lien loans averaged 6.07% in December, rising from 4.59% last January, according to S&P’s Capital IQ Leveraged Commentary & Data. Second-lien loans, a riskier form of bank debt, are more expensive for borrowers.
“We’re in very early discussions with the lead bank,” Wells Fargo & Co., regarding the company’s borrowing base, Jackson said. “Typically these discussions don’t get going until March.”
Banks consider both the value of oil and gas in the ground as well as the value of a company’s hedge portfolio, according to Jackson.
“We have a very strong reserve base and a very valuable hedge portfolio,” he said.
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