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Global fall in oil price by almost 50% has taken a toll on producers namely the small scales and shale producers. Stocks prices for them have fallen with rise in bond yields.
- Recent data from Dealogic suggests that investors are hunting for bargains and higher yields snapping up new stock and bonds from energy producers.
- Junk-rated oil-and-gas exploration and production firms have sold about $4.7 billion of bonds in the U.S. so far this year, up from $2.7 billion at this time last year, according to Dealogic.
- Companies in US and Canada offered stocks worth of $8.4 billion so far this year.
- These companies are in dire need of money and new investments as banks remain tight fisted over lending money to these companies.
Logic -
- Some companies are offering high interest rates close to 12%, for some that makes sense.
- Stocks are very cheap. Goodrich petroleum has fallen 85% since June 2014, Oasis Petroleum down nearly 77%. Bonanza Creek and Laredo Petroleum both were down more than 50%, when they came out with new offers.
- With a rebound in oil prices the return could be very high should the companies sustain this downturn.
Caution -
- Companies raising money at this stage gets far lesser than they could have at the peak, this expresses the stressed financial conditions at the ground level. Cash levels at Bonanza Creek fell from $180 million in June to $ 2.6 million, when they resort to raise further 200 million in February.
- Supply in the oil market persists that could pose further threat and result in stock dilution even more, should they again resort to offerings.
- Bond holders may not see the money back even before any official defaults. American Eagle Energy that raised money in August skipped their first interest payment this month.
- If oil prices remain low for prolonged period or even fall further, bankruptcies may go rampant. Texas based BPZ Resources filed for bankruptcy on Monday. Dune energy filed for bankruptcy protection on Sunday.
Nevertheless, the current bargain hunting frenzy may still continue for some time further.
