tricha
26-05-2014, 08:24 PM
[QUOTE=tricha;482561]
http://www.sharetrader.co.nz/images/misc/quote_icon.png Originally Posted by tricha http://www.sharetrader.co.nz/images/buttons/viewpost-right.png (http://www.sharetrader.co.nz/showthread.php?p=480997#post480997)
Shale a myth and I see some NZ super scheme recently invested 150 million into it, dickheads, mates of yours Skol :confused:
/QUOTE]
I was wrong, here it is, 250 million into a Ponzi scheme :confused:, mates of yours Skol?
I wonder if we get to know the outcome.
Super Fund invests $US250m in oil and gas with PE giant KKR
Duncan Bridgeman | Friday March 21, 2014 | 14 comments
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Guardians of New Zealand Superannuation GM Matt Whineray
ASK ME ANYTHING: NZ Super Fund CEO Adrian Orr
The NZ Super Fund is committing up to $US250 million to invest in North American oil and gas assets alongside private equity giant KKR.
The Super Fund, which has grown funds under management to $NZ25 billion, will split the investment two ways: up to $US175 million in new KKR private equity natural gas investments, and the remaining $US75 million in a fresh $2 billion KKR fund targeted at “unconventional” oil and gas resources.
Super Fund general manager of investments Matt Whineray says the new investments will broaden and diversify the Fund’s current exposure to energy, in line with a changing global energy sector.
The KKR investment is premised on attractive long-term returns in energy and significant market changes including the rapid development of natural gas and unconventional oil assets, he says.
“Developments in North American gas and oil are profoundly changing both global energy markets and markets within North America.
“For example, there is a large and ongoing decline in the burning of coal in the US as energy utilities transition towards gas supplies. Access to these opportunities is, however, difficult to achieve solely through listed markets. Partnering with KKR will give us the benefit of their expertise and deep relationships in the energy sector.”
While it is better known for its leveraged buyouts of companies, KKR also has a growing business in energy and infrastructure assets.
The New York-based firm, founded by Henry Kravis and George Roberts in 1976, has $94.3 billion in assets under management, including $8.7 billion dedicated to energy and infrastructure.
KKR Australia boss Justin Reizes said the North American oil and gas sector is fast-growing but capital-starved.
“The rapid development of unconventional shale basins provides attractive development and infrastructure investment opportunities for long-term investors such as the NZ Super Fund.”
Mr Whineray said that while the Fund would continue to hold a substantial passive exposure to the energy sector, consistent with its market cap-weighted Reference Portfolio, the KKR mandate offered a number of benefits to the Fund.
“These benefits include improved expected returns, resilience in relation to a rapidly changing sector and greater insight into, and control over, our investment exposures. Our focus on responsible investment will also be bolstered by KKR’s expertise in the management of environmental, social and governance factors.”
This is the NZ Super Fund’s third investment with KKR.
More by Duncan Bridgeman
This is serious stuff, does the above mean that the NZ Super Scheme has now invested into a fund like below.:confused:
Shale Drillers Feast on Junk Debt to Stay on Treadmill By Asjylyn Loder May 1, 2014 4:41 AM GMT+1200
Created with Highcharts 3.0.2
Feb 3Feb 17Mar 3Mar 17Mar 31Apr 14Apr 28May 1222.5025.0027.5030.0032.50* Price chart for RICE ENERGY INC. Click flags for important stories. RICE:US30.21-0.07 -0.23%
Rice Energy Inc. (RICE) (http://www.bloomberg.com/quote/RICE:US), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.
Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells -- most named after superheroes and monster trucks -- and said it will spend $4.09 for every $1 it earns in 2014.
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree (http://www.bloomberg.com/quote/DOETCRUD:IND). While the high-yield debt market (http://topics.bloomberg.com/debt-market/) has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”
http://www.bloomberg.com/image/inbmjcgJB54k.jpg (http://www.bloomberg.com/photo/shale-driller-/-i25_bh69oIec.html) Total U.S. oil output will peak at 9.61 million barrels a day in 2019, based on an Energy Information Administration reference case. The agency sees tight-oil or shale volumesPhotographer: Daniel Acker/Bloomberg Close (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
Total U.S. oil output will peak at 9.61 million barrels a day in 2019, based on an... Read More (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
http://www.bloomberg.com/image/iz0rHMu.FV68.jpg
Close
Open Total U.S. oil output will peak at 9.61 million barrels a day in 2019, based on an Energy Information Administration reference case. The agency sees tight-oil or shale volumesPhotographer: Daniel Acker/Bloomberg
Quality Assets
Rice Energy was able to borrow so easily because of the quality of its assets, which are in some of the best areas of the Marcellus, a shale formation beneath western Pennsylvania (http://topics.bloomberg.com/pennsylvania/) and West Virginia (http://topics.bloomberg.com/west-virginia/), and the company’s drilling success there, said Gray Lisenby, Rice’s chief financial officer. Demand was so high, in fact, that earlier this month Rice halted a planned four-city road show intended to entice lenders. Interest from investors after the first three stops overwhelmed expectations, Lisenby said.
Companies with a lot of debt relative to earnings use junk bonds to raise cash. Investors get higher returns because of the increased odds of not getting paid back. The debt is in demand because the Federal Reserve (http://topics.bloomberg.com/federal-reserve/) has held interest rates (http://topics.bloomberg.com/interest-rates/) near zero for more than five years, shrinking returns on safer bets. The popularity has pushed down borrowing costs for companies trying to unlock oil and natural gas trapped in deep underground layers of rock like the Bakken shale in North Dakota (http://topics.bloomberg.com/north-dakota/) or the Eagle Ford in Texas (http://topics.bloomberg.com/texas/).
Rice Energy’s bond offering this month was rated CCC+ by Standard & Poor’s (http://topics.bloomberg.com/standard-%26-poor%27s/), seven steps below investment grade, or the level above which some institutional investors, such as pension funds and insurance companies, are allowed to buy. S&P says debt rated in the CCC range is “currently vulnerable to nonpayment” and, in adverse conditions, bonds with that grade aren’t likely to be repaid. Even so, Rice Energy was able to borrow at 6.25 percent. That compares with 9.5 percent for other bonds with similar ratings, according to Bank of America Merrill Lynch index data.
http://www.bloomberg.com/image/iRkgksMVissY.jpg (http://www.bloomberg.com/photo/a-rig-drills-for-natural-gas-in-pennsylvania-/-iB.W8aV.ltSs.html) Photographer: Ty Wright/Bloomberg The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. Close (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing... Read More (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
http://www.bloomberg.com/image/iLg5kANdtrrI.jpg
Close
Open Photographer: Ty Wright/Bloomberg The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree.
Better Ratings
Some companies have been able to drill themselves to better credit ratings. In December, Oklahoma City-based Continental Resources Inc. (CLR) (http://www.bloomberg.com/quote/CLR:US), the most active driller in the Bakken, had its rating boosted from junk to Baa3, the lowest tier of investment grade, by Moody’s Investors Service. Others, such as Chesapeake Energy Corp. (CHK) (http://www.bloomberg.com/quote/CHK:US), have made changes that improved their standing with credit-rating companies. Chesapeake, based in Oklahoma City, has sold off $16 billion in assets in the past two years, cut spending and refinanced debt, and S&P said it’s considering a higher rating for the company.
Debt Agreements
By contrast, Forest Oil Corp. (FST) (http://www.bloomberg.com/quote/FST:US)’s recent battering shows how the borrow-drill-repeat strategy can backfire. Forest sold $1.3 billion in assets in 2013 to help finance its drilling. Then in February the Denver-based oil and gas producer reported disappointing well results from its marquee assets in the Eagle Ford. Forest didn’t have enough money coming in to keep from running afoul of its debt agreements. Both S&P and Moody’s cut (http://www.bloomberg.com/quote/FST:US) the company’s credit outlook to negative.
Forest’s bonds (http://www.bloomberg.com/quote/FST:US) plunged. Its $577.9 million of outstanding 7.25 percent notes due in 2019 traded at 88 cents on the dollar on April 22, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, a drop from this year’s peak of 98.4 cents on Feb. 24. The notes are now yielding 10.31 percent, up from 7.6 percent. Larry Busnardo, head of investor relations (http://topics.bloomberg.com/investor-relations/) for Forest Oil, didn’t return calls seeking comment.
“This is a melting ice cube business,” said Mike Kelly, an energy analyst at Global Hunter Securities in Houston. “If you’re not growing production, you’re dying.”
Cheap Debt
Of the 97 energy exploration and production companies rated by S&P, 75 are below investment grade, according to the credit-rating company. The average yield for energy exploration and production companies rated junk has declined to 5.4 percent from 8.1 percent at the end of 2009, compared with a drop to 5.21 percent from 9.06 percent for all companies rated below investment grade, according to Barclays.
Cheap debt, along with advances in horizontal drilling and hydraulic fracturing, or fracking, have propelled U.S. oil output to a 26-year high. Last year, the country produced 87 percent of its own energy, putting it closer to independence from foreign sources than it has been since 1985, according to the Energy Information Administration.
It’s an expensive boom. About $156 billion will be spent on exploration and production in the U.S. this year, according to a December report (http://www.pennenergy.com/content/dam/Pennenergy/online-articles/2013/December/Global%202014%20EP%20Spending%20Outlook.pdf) by Barclays analysts led by James West. That’s 8.5 percent more than last year and outpaces this year’s expected 6.1 percent growth in global expenditures, the analysts said.
Spending Treadmill
“Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?” Ivan Sandrea, a research associate at the Oxford Institute for Energy Studies in England (http://topics.bloomberg.com/england/), wrote in a report last month. “The benevolence of the U.S. capital markets cannot last forever.”
The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London (http://topics.bloomberg.com/london/). Since output from shale wells drops sharply in the first year, producers have to keep drilling more and more wells to maintain production. That means selling off assets and borrowing more money.
“The whole boom in shale is really a treadmill of capital spending (http://topics.bloomberg.com/capital-spending/) and debt,” Chauhan said.
Access to the high-yield bond market (http://topics.bloomberg.com/bond-market/) has enabled shale drillers to spend more money than they bring in. Junk-rated exploration and production companies spent $2.11 for every $1 earned last year, according to a Barclays analysis of 37 firms.
Captain Planet
Rice Energy will outspend its cash flow (http://topics.bloomberg.com/cash-flow/) through 2015, according to Moody’s. Rice said it plans to invest $1.23 billion this year building pipelines, buying acreage and drilling in the Marcellus region, where the company already has wells with names like Hulk, Captain Planet and Mojo, as well as in the nearby Utica formation in Ohio. Its first well in the Utica failed, resulting in an $8.1 million write-off last year, company records show. Its second attempt is under way.
Stock analysts say they like Rice’s growth potential. Sterne, Agee & Leach Inc., a Birmingham, Alabama-based brokerage, rated the company a “buy” in February, shortly after the initial public offering. Howard Weil, a division of Toronto-based Bank of Nova Scotia (http://topics.bloomberg.com/nova-scotia/), said Rice’s stock would do better than others in the same line of business. Shares have climbed 38 percent since the IPO.
Exploration and production companies that have wells in sweet spots “are able to raise debt because they have significant collateral value and thus are not viewed as high risk by investors,” Lisenby, Rice’s CFO, said in an e-mail.
“Asset quality and operational success drive returns and value creation for debt and equity holders,” he said. “Investors are pretty smart in recognizing this in companies and reward the companies that have those qualities.”
Still, the U.S. central bank has kept borrowing rates (http://www.bloomberg.com/quote/FDTR:IND) near zero since December 2008. An increase, expected in 2015, could cause investors to flee shale-drilling debt in search of safer returns.
“It’s a perfect set-up for investors to lose a lot of money,” Gramatovich said. “The model is unsustainable.”
To contact the reporter on this story: Asjylyn Loder in New York (http://topics.bloomberg.com/new-york/) at aloder@bloomberg.net (aloder@bloomberg.net)
To contact the editors responsible for this story: Bob Ivry at bivry@bloomberg.net (bivry@bloomberg.net) Richard Stubbe
http://www.sharetrader.co.nz/images/misc/quote_icon.png Originally Posted by tricha http://www.sharetrader.co.nz/images/buttons/viewpost-right.png (http://www.sharetrader.co.nz/showthread.php?p=480997#post480997)
Shale a myth and I see some NZ super scheme recently invested 150 million into it, dickheads, mates of yours Skol :confused:
/QUOTE]
I was wrong, here it is, 250 million into a Ponzi scheme :confused:, mates of yours Skol?
I wonder if we get to know the outcome.
Super Fund invests $US250m in oil and gas with PE giant KKR
Duncan Bridgeman | Friday March 21, 2014 | 14 comments
Share on facebook Share on twitter Share on linkedin Share on email More Sharing Services
Guardians of New Zealand Superannuation GM Matt Whineray
ASK ME ANYTHING: NZ Super Fund CEO Adrian Orr
The NZ Super Fund is committing up to $US250 million to invest in North American oil and gas assets alongside private equity giant KKR.
The Super Fund, which has grown funds under management to $NZ25 billion, will split the investment two ways: up to $US175 million in new KKR private equity natural gas investments, and the remaining $US75 million in a fresh $2 billion KKR fund targeted at “unconventional” oil and gas resources.
Super Fund general manager of investments Matt Whineray says the new investments will broaden and diversify the Fund’s current exposure to energy, in line with a changing global energy sector.
The KKR investment is premised on attractive long-term returns in energy and significant market changes including the rapid development of natural gas and unconventional oil assets, he says.
“Developments in North American gas and oil are profoundly changing both global energy markets and markets within North America.
“For example, there is a large and ongoing decline in the burning of coal in the US as energy utilities transition towards gas supplies. Access to these opportunities is, however, difficult to achieve solely through listed markets. Partnering with KKR will give us the benefit of their expertise and deep relationships in the energy sector.”
While it is better known for its leveraged buyouts of companies, KKR also has a growing business in energy and infrastructure assets.
The New York-based firm, founded by Henry Kravis and George Roberts in 1976, has $94.3 billion in assets under management, including $8.7 billion dedicated to energy and infrastructure.
KKR Australia boss Justin Reizes said the North American oil and gas sector is fast-growing but capital-starved.
“The rapid development of unconventional shale basins provides attractive development and infrastructure investment opportunities for long-term investors such as the NZ Super Fund.”
Mr Whineray said that while the Fund would continue to hold a substantial passive exposure to the energy sector, consistent with its market cap-weighted Reference Portfolio, the KKR mandate offered a number of benefits to the Fund.
“These benefits include improved expected returns, resilience in relation to a rapidly changing sector and greater insight into, and control over, our investment exposures. Our focus on responsible investment will also be bolstered by KKR’s expertise in the management of environmental, social and governance factors.”
This is the NZ Super Fund’s third investment with KKR.
More by Duncan Bridgeman
This is serious stuff, does the above mean that the NZ Super Scheme has now invested into a fund like below.:confused:
Shale Drillers Feast on Junk Debt to Stay on Treadmill By Asjylyn Loder May 1, 2014 4:41 AM GMT+1200
Created with Highcharts 3.0.2
Feb 3Feb 17Mar 3Mar 17Mar 31Apr 14Apr 28May 1222.5025.0027.5030.0032.50* Price chart for RICE ENERGY INC. Click flags for important stories. RICE:US30.21-0.07 -0.23%
Rice Energy Inc. (RICE) (http://www.bloomberg.com/quote/RICE:US), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.
Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells -- most named after superheroes and monster trucks -- and said it will spend $4.09 for every $1 it earns in 2014.
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree (http://www.bloomberg.com/quote/DOETCRUD:IND). While the high-yield debt market (http://topics.bloomberg.com/debt-market/) has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”
http://www.bloomberg.com/image/inbmjcgJB54k.jpg (http://www.bloomberg.com/photo/shale-driller-/-i25_bh69oIec.html) Total U.S. oil output will peak at 9.61 million barrels a day in 2019, based on an Energy Information Administration reference case. The agency sees tight-oil or shale volumesPhotographer: Daniel Acker/Bloomberg Close (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
Total U.S. oil output will peak at 9.61 million barrels a day in 2019, based on an... Read More (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
http://www.bloomberg.com/image/iz0rHMu.FV68.jpg
Close
Open Total U.S. oil output will peak at 9.61 million barrels a day in 2019, based on an Energy Information Administration reference case. The agency sees tight-oil or shale volumesPhotographer: Daniel Acker/Bloomberg
Quality Assets
Rice Energy was able to borrow so easily because of the quality of its assets, which are in some of the best areas of the Marcellus, a shale formation beneath western Pennsylvania (http://topics.bloomberg.com/pennsylvania/) and West Virginia (http://topics.bloomberg.com/west-virginia/), and the company’s drilling success there, said Gray Lisenby, Rice’s chief financial officer. Demand was so high, in fact, that earlier this month Rice halted a planned four-city road show intended to entice lenders. Interest from investors after the first three stops overwhelmed expectations, Lisenby said.
Companies with a lot of debt relative to earnings use junk bonds to raise cash. Investors get higher returns because of the increased odds of not getting paid back. The debt is in demand because the Federal Reserve (http://topics.bloomberg.com/federal-reserve/) has held interest rates (http://topics.bloomberg.com/interest-rates/) near zero for more than five years, shrinking returns on safer bets. The popularity has pushed down borrowing costs for companies trying to unlock oil and natural gas trapped in deep underground layers of rock like the Bakken shale in North Dakota (http://topics.bloomberg.com/north-dakota/) or the Eagle Ford in Texas (http://topics.bloomberg.com/texas/).
Rice Energy’s bond offering this month was rated CCC+ by Standard & Poor’s (http://topics.bloomberg.com/standard-%26-poor%27s/), seven steps below investment grade, or the level above which some institutional investors, such as pension funds and insurance companies, are allowed to buy. S&P says debt rated in the CCC range is “currently vulnerable to nonpayment” and, in adverse conditions, bonds with that grade aren’t likely to be repaid. Even so, Rice Energy was able to borrow at 6.25 percent. That compares with 9.5 percent for other bonds with similar ratings, according to Bank of America Merrill Lynch index data.
http://www.bloomberg.com/image/iRkgksMVissY.jpg (http://www.bloomberg.com/photo/a-rig-drills-for-natural-gas-in-pennsylvania-/-iB.W8aV.ltSs.html) Photographer: Ty Wright/Bloomberg The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. Close (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing... Read More (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html#)
http://www.bloomberg.com/image/iLg5kANdtrrI.jpg
Close
Open Photographer: Ty Wright/Bloomberg The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree.
Better Ratings
Some companies have been able to drill themselves to better credit ratings. In December, Oklahoma City-based Continental Resources Inc. (CLR) (http://www.bloomberg.com/quote/CLR:US), the most active driller in the Bakken, had its rating boosted from junk to Baa3, the lowest tier of investment grade, by Moody’s Investors Service. Others, such as Chesapeake Energy Corp. (CHK) (http://www.bloomberg.com/quote/CHK:US), have made changes that improved their standing with credit-rating companies. Chesapeake, based in Oklahoma City, has sold off $16 billion in assets in the past two years, cut spending and refinanced debt, and S&P said it’s considering a higher rating for the company.
Debt Agreements
By contrast, Forest Oil Corp. (FST) (http://www.bloomberg.com/quote/FST:US)’s recent battering shows how the borrow-drill-repeat strategy can backfire. Forest sold $1.3 billion in assets in 2013 to help finance its drilling. Then in February the Denver-based oil and gas producer reported disappointing well results from its marquee assets in the Eagle Ford. Forest didn’t have enough money coming in to keep from running afoul of its debt agreements. Both S&P and Moody’s cut (http://www.bloomberg.com/quote/FST:US) the company’s credit outlook to negative.
Forest’s bonds (http://www.bloomberg.com/quote/FST:US) plunged. Its $577.9 million of outstanding 7.25 percent notes due in 2019 traded at 88 cents on the dollar on April 22, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, a drop from this year’s peak of 98.4 cents on Feb. 24. The notes are now yielding 10.31 percent, up from 7.6 percent. Larry Busnardo, head of investor relations (http://topics.bloomberg.com/investor-relations/) for Forest Oil, didn’t return calls seeking comment.
“This is a melting ice cube business,” said Mike Kelly, an energy analyst at Global Hunter Securities in Houston. “If you’re not growing production, you’re dying.”
Cheap Debt
Of the 97 energy exploration and production companies rated by S&P, 75 are below investment grade, according to the credit-rating company. The average yield for energy exploration and production companies rated junk has declined to 5.4 percent from 8.1 percent at the end of 2009, compared with a drop to 5.21 percent from 9.06 percent for all companies rated below investment grade, according to Barclays.
Cheap debt, along with advances in horizontal drilling and hydraulic fracturing, or fracking, have propelled U.S. oil output to a 26-year high. Last year, the country produced 87 percent of its own energy, putting it closer to independence from foreign sources than it has been since 1985, according to the Energy Information Administration.
It’s an expensive boom. About $156 billion will be spent on exploration and production in the U.S. this year, according to a December report (http://www.pennenergy.com/content/dam/Pennenergy/online-articles/2013/December/Global%202014%20EP%20Spending%20Outlook.pdf) by Barclays analysts led by James West. That’s 8.5 percent more than last year and outpaces this year’s expected 6.1 percent growth in global expenditures, the analysts said.
Spending Treadmill
“Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?” Ivan Sandrea, a research associate at the Oxford Institute for Energy Studies in England (http://topics.bloomberg.com/england/), wrote in a report last month. “The benevolence of the U.S. capital markets cannot last forever.”
The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London (http://topics.bloomberg.com/london/). Since output from shale wells drops sharply in the first year, producers have to keep drilling more and more wells to maintain production. That means selling off assets and borrowing more money.
“The whole boom in shale is really a treadmill of capital spending (http://topics.bloomberg.com/capital-spending/) and debt,” Chauhan said.
Access to the high-yield bond market (http://topics.bloomberg.com/bond-market/) has enabled shale drillers to spend more money than they bring in. Junk-rated exploration and production companies spent $2.11 for every $1 earned last year, according to a Barclays analysis of 37 firms.
Captain Planet
Rice Energy will outspend its cash flow (http://topics.bloomberg.com/cash-flow/) through 2015, according to Moody’s. Rice said it plans to invest $1.23 billion this year building pipelines, buying acreage and drilling in the Marcellus region, where the company already has wells with names like Hulk, Captain Planet and Mojo, as well as in the nearby Utica formation in Ohio. Its first well in the Utica failed, resulting in an $8.1 million write-off last year, company records show. Its second attempt is under way.
Stock analysts say they like Rice’s growth potential. Sterne, Agee & Leach Inc., a Birmingham, Alabama-based brokerage, rated the company a “buy” in February, shortly after the initial public offering. Howard Weil, a division of Toronto-based Bank of Nova Scotia (http://topics.bloomberg.com/nova-scotia/), said Rice’s stock would do better than others in the same line of business. Shares have climbed 38 percent since the IPO.
Exploration and production companies that have wells in sweet spots “are able to raise debt because they have significant collateral value and thus are not viewed as high risk by investors,” Lisenby, Rice’s CFO, said in an e-mail.
“Asset quality and operational success drive returns and value creation for debt and equity holders,” he said. “Investors are pretty smart in recognizing this in companies and reward the companies that have those qualities.”
Still, the U.S. central bank has kept borrowing rates (http://www.bloomberg.com/quote/FDTR:IND) near zero since December 2008. An increase, expected in 2015, could cause investors to flee shale-drilling debt in search of safer returns.
“It’s a perfect set-up for investors to lose a lot of money,” Gramatovich said. “The model is unsustainable.”
To contact the reporter on this story: Asjylyn Loder in New York (http://topics.bloomberg.com/new-york/) at aloder@bloomberg.net (aloder@bloomberg.net)
To contact the editors responsible for this story: Bob Ivry at bivry@bloomberg.net (bivry@bloomberg.net) Richard Stubbe