Capital Markets

Bond Market Gets Energized

Energy companies turn on the juice with billions of dollars worth of new fixed-income offerings.
Stephen TaubJanuary 8, 2009

A number of energy companies this week tapped the slowly thawing fixed-income market. In an encouraging turn, not all of them are rated A or better. In fact, one of the companies, Nabors Industries Ltd., saw its credit rating cut as a result of its offering.

Nabors priced $1.125 billion in senior unsecured notes due 2019 in a private placement. The interest rate will be 9.25 percent, and Reuters reported the notes were priced at 6.76 percentage points over U.S. Treasuries. The oil drilling company said it will use the proceeds to repay or repurchase debt and general corporate purposes.

In response to the offering, Fitch Ratings downgraded the company’s ratings to BBB-plus from A-minus. However, the rating outlook was revised to stable from negative.

“Today’s rating action reflects both the weaker operating environment for land based drilling companies as well as expectations of increased leverage for the company,” said Fitch in a report. “As commodity prices remain significantly below levels witnessed during the recent past, upstream companies are expected to significantly curtail activity levels in the coming year, directly impacting the drilling and services sector.”

As a result, Fitch said it now expects Nabors to realize weaker EBITDA and cash flows in 2009 than it previously forecast in July 2008, when it revised the company’s rating outlook to negative. “In addition, capital expenditure levels are now expected to be above Fitch’s previous expectations, resulting in a significantly smaller cash build during 2009 than Fitch had previously expected,” it added.

Meanwhile, Devon Energy on Tuesday sold $1.2 billion in debt in two parts, according to Reuters.

The company said in a regulatory filing that it will use the proceeds to repay about $1 billion of outstanding commercial paper, and for general corporate purposes.

The company offered $500 million in five-year notes, priced to yield 5.667 percent, or 400 basis points over Treasuries, and $700 million in 10-year notes, priced to yield 6.341 percent, or 385 points over Treasuries. The paper was rated Baa1 by Moody’s and BBB-plus by S&P.

Also on Tuesday, Canadian energy company TransCanada Pipelines Ltd. sold $2 billion in two parts, according to Reuters.

It sold $750 million in 10-year notes, priced to yield 7.128 percent, or 460 basis points over Treasuries. It also sold $1.25 billion of 30-year bonds. They were priced to yield 7.698 percent, or 460 points over the benchmark.

CenterPoint Energy Houston Electric sold $500 million in five-year general mortgage bonds, according to Reuters, up from an originally planned $400 million. The paper — rated Baa2 by Moody’s and BBB-plus by S&P — was priced to yield 7 percent, or 528.6 points over Treasuries.

On Monday, PacifiCorp, a unit of MidAmerican Energy Holdings, which is a subsidiary of Berkshire Hathaway, sold $1 billion in two-part first mortgage bonds, according to Reuters.