Southwestern Energy Co.’s $4.5 billion debt and equity capital raises in January arrested a hemorrhaging public marketplace. The massive deals to fund a southwest Marcellus and Utica acquisition breathed life into a market that had seized up following the late 2014 freefall of oil prices, set in motion by OPEC’s late November announcement that it would not backstop oil prices. Most importantly, the financings showed that the market did indeed have a heartbeat and, in fact, a healthy prognosis.

“Coming into the year in both of these areas, the market generally believed—particularly for noninvestment-grade companies and small- to mid-cap companies—that perhaps the markets were not available to them,” Tim Perry, Credit Suisse co-head of Americas oil and gas and global E&P, said. “That obviously is being disproved. In fact, we’ve had significant success on several transactions.”

Credit Suisse has led or been co-bookrunner on multiple recent equity transactions for E&Ps. Tim Perry, Credit Suisse co-head of Americas oil and gas and global E&P, said, "The good news is companies do have access to the capital markets now."

Since then, Credit Suisse has led or been co-bookrunner to eight of 15 equity transactions announced through the first week of March and several debt deals, marking the re-opening of the capital markets since the beginning of the year.

Diamondback Energy Inc. was first out of the blocks with a general issuance not tied to an acquisition. The Midland Basin operator raised $106 million of common stock in January. That was followed by Bonanza Creek Energy, a Niobrara-focused company, with $182 million, and Parsley Energy, another Permian-focused E&P, with $231 million of public equity. Toward the end of February, Credit Suisse also was sole bookrunner on offerings for Newfield Exploration Co. and Laredo Petroleum Inc.

Brad Hutchinson, managing director of upstream investment banking at Barclays, led a $377 million debt and equity combo for Jones Energy Inc. three weeks following the Southwestern deals. “The markets were shut down in December,” he said. “Today, there is the ability to access the equity markets for companies that want to do an offensive equity deal.”

Seeing the window open, Synergy Resources Corp., Noble Energy Inc. and Concho Resources Inc. took their opportunities as well to aggressively access capital. Small-caps Emerald Oil Inc. and Goodrich Petroleum Corp. felt more urgency, but were able to get deals done.

On the heels of the Diamondback general issuance offering, Synergy Resources accessed the market for $200 million just seven days later, led by Seaport Global Securities, the parent company of Global Hunter Securities. Michael Bodino, managing director of upstream investment banking for Global Hunter Securities, said that it was the launch of the Diamondback offering, which was upsized, that gave the firm the assurance to take the Niobrara pure-player to market.

“We entered the year pretty nervous on what the equity markets were going to do,” he said. After seeing how Diamondback was received, “we had the confidence to push along Synergy.” His intuition paid off. After exercising an overallotment, Synergy netted $190 million. “We saw it in 2009 too—the best equity performers can still access capital.”

Said Perry, “The good news is companies do have access to the capital markets now.”

Balance sheet management

While Southwestern’s post oil-price-apocalypse financings were aimed at deal financing, the dozen raises in the two months following were largely for companies bolstering balance sheets. Perhaps the common threads in most of these deals are modest leverage preceding the financings, and portfolios of quality, core assets in desirable basins.

“Ironically, the companies that have been accessing the markets are not the ones that are going to hit a wall if they don’t do something in the next 12 months,” Hutchinson observed. “It’s the opposite; folks are shoring up balance sheets to fortify their liquidity against all price scenarios, and to raise strategic capital in front of what could be an opportune time to invest in the sector over the next six to 18 months.”

Rob Santangelo, co-head of Americas energy capital markets for Credit Suisse, concurs. “The markets are open for companies that have solid assets and solid management, and need some equity to adjust for the movement in commodity prices,” he said. “The financings we’ve focused on, and the market in general, are good companies that are proactively reducing their leverage so they can continue to invest in assets that are economic.”

Brad Hutchinson, managing director of upstream investment banking at Barclays, said, "Today, there is the ability to access the equity markets for companies that want to do an offensive equity deal."

Following a 50% revenue haircut due to oil price declines since last summer, companies are simply being pragmatic in recalibrating leverage levels to what they perceive as a long period of lower commodity prices, he said, even if it involves dilution. “This is a bird in the hand to raise capital at reasonable levels.”

The motivation? Pay off bank debt, keep cash on hand for operating expenses, and have liquidity for opportunistic purchases.

Ira Green, managing director, head of capital markets, for Simmons & Co. International, said E&P management teams are being prudent by shoring up balance sheets in a time of economic uncertainty. Simmons co-managed the near $1 billion follow-on offering by Noble Energy.

“What we’re seeing right now is overnight equity add-ons,” Green said, “which means they get priced in one day, literally overnight. Nobody knows how long this downcycle will last. If we knew it would be over tomorrow, you might not see this many equity offerings, but we just don’t know how long commodity prices will stay at these levels.” Even if companies have strong balance sheets, “if they can raise equity now, they’re doing it.”

“These are your top quartile performing names,” Bodino said. “They have good balance sheets, good assets and good management, and still generate good economic returns. These guys can access equity pretty easily.”

Another theme: raising liquidity to take advantage of consolidation opportunities. “These guys are looking to be acquisitive in the most economic basins where they are drilling wells,” said Bodino.

While some companies such as Apache Corp., Anadarko Petroleum, EOG Resources and Murphy Oil have chosen to sell assets to boost liquidity, others are tapping the capital markets due to a disparity between equity and asset valuations.

“The equity markets right now are discounting an oil price that is in excess of where you can get an A&D deal printed today,” said Barclays’ Hutchinson. “In the A&D market, the bid/ask ranges haven’t yet coalesced; sellers don’t want to pay more than strip. But the equity markets are willing to either pay more than strip, or price in cost reductions that have started to happen in the sector, and probably a combination of both.”

Not all have strong balance sheets, however. “You’re seeing some companies that are more highly leveraged trying to get deals done,” Green said. “These companies have borrowing base redeterminations coming up and are trying to get out in front of those. It’s all in making sure they survive this downcycle.”

Goodrich Petroleum falls into that camp. Struggling with leverage and liquidity concerns while trying to prove up promising acreage in the Tuscaloosa Marine Shale, the company successfully issued $100 million in senior notes, followed on with a $50 million equity issuance, just beating a downward borrowing base redetermination.

Have-nots

With all the positive observations, that begs the question: Are capital markets open equally for everyone today?

“Absolutely not,” Bodino said. “Right now, it’s open for the better equity performing companies, unless the equity holders are willing to backstop getting a deal done. It would be very hard for the bottom quartile performers to raise money unless a substantial amount of equity holders support the deal in what would amount to a rights offering.”

This was the case with Eclipse Resources, he said, which closed a private investment in public equities (PIPE) deal in late December. “We have seen the exception with heavily shorted names like Goodrich Petroleum, where buyers use the offering to close out short positions.”

He points to Emerald Oil’s $27.5 million placement as an example in which private-equity shareholder White Deer Energy LP bought the first $15 million of the offering, more than half. Johnson Rice & Co. led the issuance. Emerald’s short position dropped from 14.6 million shares to 10.4 million shares post offering.

“Would Emerald have been able to get its deal done without White Deer backstopping some portion of it? For companies that may not be in the best areas with the best balance sheets, they may have to look to their existing shareholders to find solutions, and work in conjunction with them to get deals done. Their shareholders help protect their interests and, once they’ve taken any bankruptcy risks off of the name, then the company has the ability to survive and thrive.”

While high-quality names are able to get the overnights accomplished, it’s typically the smaller companies that face an uphill challenge. “If you’re trading below $5, it’s harder to do, but not impossible,” said Green. “The smaller and more leveraged you are, the harder it is to do an overnight.” These companies, he said, are going to explore all options to get equity on the balance sheets in this current environment.

Thus are companies that need capital the most kept out of the market?

“I wouldn’t say they’re completely out of the market; there are some other instruments they might access, or their discounts for overnight offerings might be greater than others. But if you’ve broken your debt covenants, that’s probably a tougher group to get an equity offering done.”

Said Bodino, “Some companies are looking at ways to heal their balance sheets. They have to figure out how to heal their debt before they can do anything with their equity. That’s why you’re seeing so many of these companies hiring advisors. They recognize that.”

Investor sentiment

According to Credit Suisse’s Santangelo, the motivation of the buyside is simple: “They’re taking the view through the valley.” Investors are identifying companies with assets, management teams and balance sheets that they believe are going to be competitive. “They’re willing to invest even while commodity prices are still relatively near their lows.”

Simmons’ Green sees it similarly. “A lot of these investors got out on the way down, and this is re-establishing an entry point for them. It’s a way to get in and replace some of your bets at a price below market close.” These investors are looking for high-quality issuers in which the stock has come down considerably, and they can get in at a price below market. “From their perspective, it’s a way to reestablish a position in a sector that’s seen a lot of sell-off.”

Rob Santangelo, co-head of Americas energy capital markets for Credit Suisse, said the buyside's motivation is simple: "They're taking the view through the valley."

But the opposite is true, too. Over-levered companies might find a cold shoulder if they attempt the markets. “If it’s a distressed situation, it’s going to be tougher” to access capital, Bodino said. “It makes it difficult to show the use of proceeds. Nobody wants to put money into a company just to pay down debt.”

Who are the buyers of these deals? About half of the takers are from page one shareholders in the companies making the offerings, and from dedicated energy money picking stocks and basins on a relative value, Santangelo said. However, “a tremendous amount of buyers are nonenergy specialists. They believe we’re at a relatively good entry point for these stocks, and that we’re closer to the bottom than the top. They’re selectively making bets.

“The perception of buyers is that oil has found a bottom, and these offerings provide an opportunity to build positions at the best pricing to take advantage of a potential rebound in oil prices. Even if it takes months, the returns can be spectacular.”

Michael Bodino, managing director of upstream investment banking for Global Hunter Securities, said it was the launch of the Diamondback offering, which was upsized, that gave the firm the assurance to take Niobrara pure-player Synergy Resources to market.

High-yield hiccups

Some of the same themes permeate the leveraged finance markets.

From October through December, “we saw almost everything without exception in the upstream space move down from 10 to 15 basis points for higher-rated names, and from 20 to 30 points for lower-rated names,” said Dave Alterman, Credit Suisse North American head of the leveraged finance origination and restructuring group.

“In December, we saw everyone lining up on the sellside and no one lining up on the buyside, reminiscent of 2008.”

In January, however, Credit Suisse led a successful senior notes deal for privately held Permian player CrownRock LP. The $350-million high-yield raise was at 98.5% of par for an all-in yield of about 8%, providing drilling capital and debt repayment.

“Interestingly, the demand profile for that order book was done on a one-and-a-half-day format, with 80 accounts, and a billion-six [dollars] of orders for a $350 million deal. So the market is there for good companies.”

Global Hunter’s Bodino said they are seeing interest across the board, not just for equities. “Investors have a tremendous appetite for high-yield paper with good companies whose debt is trading at a discount. If you’re a reasonably strong credit quality company, the market is receptive.”

But the gap between those has widened, he said. Mid-year 2014, when the debt markets were frothy, most yields were single digit with a lot of debt pricing above par. Today, “you see things priced to yield from 2% to 70%—the price is all over the board.”

Ira Green, managing director, head of capital markets, for Simmons & Co. International, said, "What we're seeing right now is overnight equity add-ons, which means they get priced in one day, literally overnight."

For example, where Anadarko Petroleum’s notes trade at 2% today, the yield on a small, levered company like Alta Mesa Holdings jumped from 7.2% to 22% in the past several months.

“There is certainly a credit quality difference in the market, and clearly, the wedge between the haves and have-nots has gotten wider. Many companies that were in the high single-digit yields last summer are in the high teens now.”

Yet the debt markets have been more delayed in responding. Barclays’ Hutchinson characterized the high-yield market as selectively available, but increasingly accessible. “It’s not going to be at the rates companies were getting months ago, but we do believe the high-yield market is increasingly accessible. Rates are recovering off their highs.”

Barclays helped Jones Energy place $250 million of 9.25% unsecured notes with Magnetar Capital and GSO Capital Partners in January.

Hutchinson adds that another flavor is developing. “A bunch of second lien offerings are either brewing or have happened. That second lien activity is more or less for companies that are looking to extend their liquidity beyond just their first lien.”

Some $30 billion in private capital is ready to be allocated into the leveraged energy sector now, he estimates.

“There is an opportunity for a lot of that money to work its way in through these second lien deals, or through high-yield deals where companies want to take all the risk off the table. They go place it directly, so there is no risk.”

To prove his point, and after this discussion, Gulf of Mexico operator Energy XXI in early March announced a private offering upsized to $1.45 billion in senior secured second lien notes to institutional buyers. That follows Goodrich’s $100 million second lien issuance in late February with an 8% coupon.

Credit Suisse’s Alterman added alternative asset managers are looking for a way to get into the space—investors that haven’t historically participated in the leveraged financed energy markets.

“We think, based on 70 to 80 discussions we’ve had, with nontraditional energy investors, there is something like $100 billion of money looking to get put to work in the overall oil and gas complex to take advantage of this dislocation.

“The vast majority of that money is looking for almost the exact same criteria—first lien or second lien, just making sure it’s secured, and a 10% to 12% return with at least a double-digit coupon, a couple of points of original issue discount, and at least one to two years of call protection.”

Going forward

The receptive market response to recent deals might herald a turn for the industry, Green said. “Any time you can get an equity offering done in a sector that’s been under siege, that’s a good sign. I’m not sure it’s an absolute turning point, but it’s always good to see investors participating in equity offerings.

“Whether we move forward, or backward then forward, is undetermined, but it’s better than these deals not getting done. This is all driven by investors’ outlook on the commodity price deck, and the confidence that that is the correct deck.”

In the near term, however, the marketplace is going to see more of these add-on offerings, “and it’s going to be choppy,” Green said.

Credit Suisse’s Santangelo noted that transactions have generally been met with strong investor receptivity, with the average transaction being upsized somewhere between 50% to 100% to the launch size. “The reception has been good,” he said. “Some of the bear case around leverage has been defeated, and the stocks have had a rally on the back of that success.”

There is absolutely still demand and appetite to participate in deleveraging transactions, and there is still an ability to transact successfully and in size, he said. “It will simply be more important to make sure your tactic and approach going into the market is well-calibrated and well-measured.”

Hutchinson said the capital markets are stabilizing and increasingly accessible as commodity prices have leveled through February. The cost base and the price curves are resetting in everybody’s minds: buyside, sellside and management teams.

“Once that happens—and I think it’s happening now—the markets will reassess and we’re back in business. We believe we’re going to be back to an active market in all areas on the E&P side, financial markets first and then strategic/A&D deals a little later this year.”

At press time, a flurry of capital raises were coming to market: Oasis Petroleum, Energy XXI, Antero Resources, Encana Corp., Comstock Resources and Laredo Petroleum tapped in with various debt and equity issuances in a matter of days. As momentum increases, more are sure to follow.

Taking survey of the activity in late February and early March, one banker gave his prognosis: “The markets are open.”