NEWS OF THE DAY:
Wall Street Opens Back Up to Oil and Gas—But Not for Drilling
Joe Wallace, Collin Eaton, The Wall Street Journal, July 15, 2021
Oil-and-gas companies are using cash from debt offerings to shore up balance sheets rather than to boost production.
Energy companies are raising money again from Wall Street at superlow borrowing costs, thanks in part to higher oil prices. The one thing most investors don’t want them to do with it is pump more crude.
Speculative-grade energy companies, including oil producers, pipeline operators and refineries, have issued bonds in the U.S. at a record pace this year, raising about $34 billion so far, according to LCD, a unit of S&P Global Market Intelligence. Cash is primarily heading toward riskier borrowers in the shale patch, which by this time last year had raised about half as much from bond issuances.
Laredo Petroleum Inc. on Tuesday issued $400 million of bonds due for repayment in 2029 with a coupon of 7.75%. The Oklahoma-based oil-and-gas producer plans to use the money in part to pay off other debts.
The willingness of investors to finance shale oil producers marks a shift from 2019 and the first half of 2020, when years of poor returns and then the pandemic caused funding to dry up.
Wide-open capital markets introduce a new wrinkle into the debate over the direction of crude prices, which already have jumped about 49% this year to roughly $72 a barrel in the U.S. The ability to borrow at relatively low rates has put U.S. oil companies on surer financial footing, ensuring there are plenty of producers that could open the taps if needed to keep crude prices in check.
The catch: Investors want to see companies repairing their balance sheets and delivering to creditors and shareholders rather than plowing money into new wells.
Bond issuance by speculative-grade oil-and-gas companies in the U.S. Source: LCD, a unit of S&P Global Market Intelligence Note: Year-to-date figures are through July 6.
The restraint demanded by investors stands in contrast to previous periods of breakneck growth in U.S. production. It raises the prospect that the nation’s output—which has been largely flat this year—may not rise to offset a recovery in demand as major economies roll back coronavirus restrictions.
Companies are refraining from deploying money to raise output, which in turn is tightening the balance between supply and demand, said Lex Maultsby, a managing director for leveraged finance at Bank of America. “Most of the debt financings are principally extending debt maturities and not being used to fund…production growth.”
Asset manager Janus Henderson Investors has bought bonds of energy companies in recent months, including newly issued debt, because bond prices looked low and primed to rise as oil markets rallied. “In order to get the support of debt markets, they had to get more conservative around their balance sheets,” said portfolio manager Tom Ross.
The stream of cash isn’t indiscriminate, however: Mr. Ross said companies that aren’t preparing for a world of lower hydrocarbon consumption will increasingly struggle to access funding. Investors are looking to lend to companies that can make money with crude prices at or below $50 a barrel, energy bankers say.
Strong investor demand has led to tumbling borrowing costs. The gap between yields on speculative-grade U.S. dollar bonds issued by energy firms and those on supersafe Treasuries—a gauge of how risky investors perceive company debt to be—fell to 3.32 percentage points this month. That was the lowest spread since July 2014, according to Bloomberg Barclays data.
The drop in borrowing costs also reflects changes within the world of junk-bond issuers. Defaults last year culled some of the riskiest bonds from the crop of speculative-grade energy companies. Some bigger, higher-quality issuers fell into the bucket after downgrades by credit-ratings firms.
Wall Street’s fresh embrace of the oil patch came when successful Covid-19 vaccine trials last November spurred a rebound in energy prices. Many money managers are encouraged by companies’ single-minded focus on reducing debt levels. Comparatively high yields on energy bonds also attracted investors.
When U.S. oil production boomed a few years ago, companies fueled growth by raising money from Wall Street. In contrast, about 88% of the industry’s high-yield bond sales this year have gone toward paying down existing debt to lower interest costs or extend maturities. That compares with 52% to 65% from 2012 to 2015, the LCD data show.
Pioneer Natural Resources Co. and Diamondback Energy Inc., for example, both raised more than $2 billion to refinance debt following large acquisitions.
Hundreds of companies had been tipped into bankruptcy in the oil busts of the past decade, underscoring how heavily debt could weigh on the capital-intensive business when used to fuel growth, said Ken Settles, a managing partner at Sailing Stone Capital Partners LLC.
“There’s a better appreciation in the capital markets for the vulnerabilities of the shale oil business,” Mr. Settles said.
OIL:
Oil prices extend losses on expected supply increase
Reuters, July 15, 2021
Oil prices fell on Thursday, extending losses as investors braced for increased supplies after a compromise deal between leading OPEC producers and as U.S. fuel stocks rose, raising concerns over demand in the world’s largest consumer.
Brent crude dropped 66 cents, or 0.9%, to $74.10 a barrel by 1410 GMT and U.S. West Texas Intermediate (WTI) crude was down 61 cents, or 0.8%, at $72.52.
Both benchmarks slid more than 2% on Wednesday after Reuters reported that Saudi Arabia and the United Arab Emirates (UAE) had reached a compromise that should pave the way for a deal to supply more crude to a tight oil market and cool soaring prices.
“The market is not taking any chances. Prices are very overbought anyway, so traders might want to take some money off the table before the deal is concrete,” said Avtar Sandu, senior commodity trader at Phillips Futures in Singapore.
Talks among the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, a group known as OPEC+, had broken down this month after the UAE objected to an extension to the group’s supply pact beyond April 2022.
However, analysts at Goldman Sachs, Citi and UBS expect supplies to remain tight in the coming months even if OPEC+ finalises an agreement to raise output.
“With the oil market already in deficit and demand growth outpacing supply growth, the crude market will likely tighten further this summer,” said UBS analyst Giovanni Staunovo.
“We believe ongoing declines in global oil inventories could boost Brent to $80 per barrel and WTI to $77 per barrel between now and September.”
OPEC stuck on Thursday to its forecast for a strong recovery in world oil demand for the rest of 2021 and predicted oil use would rise further in 2022, similar to pre-pandemic rates.
In the United States, crude stockpiles fell for an eighth straight week last week, but gasoline and diesel inventories rose despite a drop in refinery utilisation rates, data from the Energy Information Administration showed on Wednesday.
The large drawdown in crude stocks did little to boost oil prices as traders focused on the first rise in total petroleum stocks since early June, analysts said.
Oil prices also came under pressure from data showing that China’s economy grew slightly more slowly than expected in the second quarter, weighed down by higher raw material costs and new COVID-19 outbreaks.
However, China, the world’s top crude importer, also reported record crude processing volumes at its refineries in June, easing some of the downward pressure on prices.
Elsewhere, the prospect of a quick return of Iranian oil supplies to global markets has been pushed back as negotiations over the revival of the 2015 nuclear deal will not resume until mid-August when the new president takes office.
GAS:
Natural-gas prices fall as EIA reports a weekly rise of 55 billion cubic feet in U.S. supplies
Myra P. Saefrong, Market Watch, July 15, 2021
The U.S. Energy Information Administration reported on Thursday that domestic supplies of natural gas rose by 55 billion cubic feet for the week ended July 9. On average, analysts polled by S&P Global Platts forecast an increase of 46 billion cubic feet in natural-gas stocks. Total stocks now stand at 2.629 trillion cubic feet, down 543 billion cubic feet from a year ago and 189 billion cubic feet below the five-year average, the government said. Following the data, August natural gas NGQ21, -0.22% moved lower, trading down 3.2 cents, or 0.9%, at $3.628 per million British thermal units. Prices were at $3.65 shortly before the data.
MINING:
Coeur receives preliminary OK for Kensington expansion
Elwood Brehmer, Alaska Journal of Commerce, July 14, 2021
The U.S. Forest Service is likely to approve a plan that would allow the Kensington gold mine near Juneau to operate for at least 10 years longer based on a draft decision published July 9.
If the draft record of decision remains substantively the same in its final version the underground mine’s life would be extended from 2023 out to 2033.
Chicago-based Coeur Mining Inc. applied for the first amendment to its operations plan in September 2019.
Extending the life of Kensington in this case involves increasing the mine’s tailings storage capacity by 4 million tons, or nearly 50 percent, to approximately 8.5 million tons, according to the draft decision. That would be done by raising the height of the tailings treatment facility from 88 feet to 124 feet and constructing another 40-foot “back dam” between the treatment facility and Upper Slate Lake, a natural lake.
The draft approval also allows Coeur to expand the mine’s existing Pit No. 4 and Comet waste rock storage facilities as well as construct a new waste rock facility for a total storage capacity increase of 6 million tons.
The work would also require 1.75 miles of new roads, according to the Forest Service.
The development growth would also allow Coeur to increase throughput at Kensington’s mill from approximately 2,000 tons to 3,000 tons per day.
Located about 45 miles north of Juneau on the edge of Lynn Canal, Kensington employs nearly 370 people.
“The Forest Service recognizes the importance of mineral resources and encourages safe, responsible mineral exploration and development as part of our multiple-use mandate,” Tongass National Forest Supervisor Earl Stewart said in a prepared statement. “We have worked closely with Coeur Alaska to mitigate potential impacts of their proposed extension of operations for the mine. Public engagement has been and continues to be an important part of the process.”
Forest Service officials opened a 45-day objection period along with publication of the draft decision that is open only to individuals who submitted “specific, timely comments” during any of the comment periods for the project, the July 9 announcement states.
In January, the Juneau-based Southeast Alaska Conservation Council requested the agency require dry-stack tailings to limit spill risk to nearby Berners Bay, an ecologically significant area, following the release of the draft EIS.
Southeast Alaska Fishermen’s Alliance Executive Director Kathy Hansen wrote in January comments on the project that the group supports Coeur’s plan because mining is an important part of the region’s economy, along with fishing, and the company’s operations have not harmed the surrounding marine environment.
Coeur is proposing to improve Dolly Varden habitat by constructing new stream channels and small stream deltas along with replacing three culverts to facilitate fish passage.
Forest Service officials state in the draft record of decision that there is a high likelihood that the tailings treatment facility — formerly Lower Slate Lake — will be restored to long-term fish habitat after closure of the mine.
The expansion project would result in the loss of approximately 52 acres of wetlands through water inundation or fill; however, Coeur’s reclamation plan calls for a net increase in wetlands in the area once the mine is closed, according to the Forest Service.
Coeur has operated the mine since startup in 2010, when Kensington represented about 5 percent of the company’s precious metal assets. Now, Kensington is nearly 30 percent of Coeur’s precious metal assets among its five operating mines, according to the company.
This year Coeur expects to produce between 115,000 to 130,000 ounces of gold at Kensington, very much in line with the 125,000 ounces produced last year. Kensington held an estimated 331,000 ounces of reserves at the end of 2020 and another 830,000 ounces worth of mineralized material, according to Coeur’s annual report. The mine also produced 28 percent of the company’s revenue last year.
Coeur expects to spend $23 million to $30 million on capital investments at Kensington this year that will be focused on pit development and equipment replacements, according to a corporate presentation.
POLITICS:
Murkowski camp teases fundraising ahead of deadline
Becky Bohrer, Associated Press, July 15, 2021
Sen. Lisa Murkowski hasn’t officially announced if she will run again next year, but her campaign released fundraising details Wednesday that an adviser says “strongly positions” the Alaska Republican for a reelection bid.
Kevin Sweeney, a consultant to the campaign who ran Murkowski’s comeback 2010 write-in bid, said Murkowski’s focus is on her work in Washington. But he told The Associated Press that the fundraising shows Murkowski also is “doing the work to make sure that she’s positioned for reelection, when that time comes.”
Murkowski’s campaign released top-line numbers but Sweeney was not immediately able to provide a copy of the four-page summary of the report that also gets filed with the Federal Election Commission.
The campaign said Murkowski had raised $1.15 million in the second quarter, which ended June 30, and had about $2.3 million on hand.
Wednesday’s campaign statement comes ahead of a filing deadline and days after Republican Party leaders in Alaska endorsed Kelly Tshibaka, a former state Department of Administration commissioner. Murkowski, who has a reputation as a moderate, has at times been at odds with party leaders on issues such as abortion and in her criticism of former President Donald Trump.
Tshibaka, in a statement after the vote by party leaders, said she was “grateful and thrilled” to have the support.
“I have pledged that I will be true to our shared, conservative Alaska ideals and be a senator upon whom they can depend to make every decision based on what is best for our great state,” she said.
Murkowski said she has “and will continue to fight for Alaskan values in the U.S. Senate. Alaskan voters will decide who represents them in DC and I work every day to earn their support.”
Tshibaka’s campaign in a statement said she has raised more than $750,000 since announcing her candidacy on March 29 and it emphasized support from small donors. Tshibaka in her first quarter report disclosed raising about $215,000 as of March 31.
Tim Murtaugh, who is working on Tshibaka’s campaign, noted the second quarter filing deadline is Thursday.
Tshibaka has highlighted on her campaign site interviews on conservative national networks and recently announced an endorsement from Trump.
Murkowski was one of seven Republican senators who voted to convict Trump during a Senate impeachment trial earlier this year. Trump was acquitted of a charge of incitement of insurrection related to the Jan. 6 U.S. Capitol riot.
Murkowski was appointed to the U.S. Senate in late 2002 by her father, then-Gov. Frank Murkowski, a fact that still rankles some residents. She was elected to her first six-year term in 2004.
Murkowski lost her 2010 Republican primary to tea party favorite Joe Miller but won the general election with a write-in campaign. In a crowded 2016 general election field that included Miller running as a Libertarian, Murkowski won with 44% of the vote.
Alaska voters last year approved sweeping changes to the state’s election process that would end party primaries and implement ranked-choice voting in general elections. Under the new system, the top four vote getters in the primary, regardless of party, advance to the general election.
The system is set to take effect for next year’s races. It’s currently being challenged in court.
CLIMATE CHANGE:
Chevron and Cummins Announce Strategic Collaboration on Hydrogen
Chevron U.S.A. Inc., through its Chevron Products Company division (Chevron), and Cummins Inc., a global power and hydrogen technologies leader, announced a memorandum of understanding (MOU) to explore a strategic alliance to develop commercially viable business opportunities in hydrogen and other alternative energy sources.
The MOU provides the framework for Chevron and Cummins to initially collaborate on four main objectives: advancing public policy that promotes hydrogen as a decarbonizing solution for transportation and industry; building market demand for commercial vehicles and industrial applications powered by hydrogen; developing infrastructure to support the use of hydrogen for industry and fuel cell vehicles; and exploring opportunities to leverage Cummins electrolyzer and fuel cell technologies at one or more of Chevron’s domestic refineries.
“Chevron is committed to developing and delivering affordable, reliable, ever-cleaner energy, and collaborating with Cummins is a positive step toward our goal of building a large-scale business in a lower-carbon area that is complementary to our current offerings,” said Andy Walz, president of Chevron’s Americas Fuels & Lubricants. “Hydrogen is just one lower-carbon solution we are investing in that will position our customers to reduce the carbon intensity of their businesses and everyday lives. We’ve also invested in developing and supplying renewable natural gas, blending renewables into our fuels, coprocessing biofeedstocks in our refineries, and abatement projects that will reduce the carbon intensity of our operations.”
“Working with Chevron to advance hydrogen technology and accelerate ecosystem development helps us continue our goal in enabling a carbon-neutral world,” said Amy Davis, vice president and president of New Power at Cummins. “The energy transition is happening, and we recognize the critical role hydrogen will play in our energy mix. We’ve deployed more than 2,000 fuel cells and 600 electrolyzers around the world and are exploring other hydrogen alternatives including a hydrogen-fueled internal combustion engine, as we continue to accelerate and harness hydrogen’s powerful potential.