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Company Peer Group AnalysisIHS Herold

Companies & Transactions

Confidential. © 2018 IHS Markit™. All rights reserved.

29 May 2018

ContactsHassan Eltorie, Research and Analysis Associate Director ∙ [email protected], +1 713 369 0244

Confidential. © 2018 IHS Markit™. All rights reserved. 2 29 May 2018

IHS Markit | Company Peer Group Analysis

Higher oil prices outweigh rising interest rates so far; debt investors continue to express confidence in E&Ps, as most 2018 bond yields to maturity lower than 2017 Hassan Eltorie, Research and Analysis Associate Director

Key implicationsFor the 45 companies in the IHS Markit North American E&P peer group (composed of Small, Midsized, and Large E&Ps), the April 2018 average bond yield to maturity (YTM) declined slightly from September 2017, dropping from 8.0% to 7.7%, indicating continued debt investor confidence in E&Ps. The decline is even more encouraging when factoring in recent increases in the federal funds rate, from 1.25% in September 2017 to the current 1.75%.

Of the 45 companies, 18 had increases in the April 2018 bond average YTM compared with September 2017, but for almost all of the 18, the increase was 1% or less. For 24 companies, there was a decline in the April 2018 average YTM compared with September 2017, with the largest declines concentrated in the high- and moderate-risk E&Ps. For 3 companies, there was no change in YTM.

For the companies with investment-grade securities, the current average spread of 146 basis points versus US Treasuries is significantly lower than the average of 377 points reached in February 2016, when oil prices bottomed out. Even more encouraging, the current yield spread is lower than the 182 basis points in early 2014, when oil was hovering around the $100/bbl mark.

continued on next page 3

This examination of bond yield-to-maturity (YTM) rates for the 45 companies in the IHS Markit North American E&P peer group (composed of Small, Midsized, and Large E&Ps) is an update from our previous, 22 September 2017 report. During the oil boom, E&Ps financed rocketing production growth and sizable cash flow deficits with cheap money during a low interest rate environment. Total debt for the companies doubled from $125 billion in 2010 to $250 billion in 2015, as shown in the chart below. As debt ballooned and as oil prices collapsed, as many as 160 North American E&Ps declared bankruptcy or commenced strategic reviews.

As E&Ps emerge from the rubble of the 2014 oil price collapse and move solidly into recovery, debt burden fears remain. Our previous report allayed fears of a debt reckoning by showing that high yields on E&P bonds was an issue for the few, but not the many. In this update, our research reinforces our previous conclusions, drawing

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Source: IHS Markit © 2018 IHS Markit

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particular support from the recent oil price rally, which has boosted debt investor confidence in oil companies despite rising interest rates. Whether the rally in oil prices proves sustainable remains to be seen, but a consensus has grown around a rising interest rate environment. How E&P bond yields react to the changing environment is something we will be monitoring.

For the 45 North American E&Ps in the overall peer group, the average YTM in April 2018 was 7.7%, down slightly from 8.0% in September 2017, indicating continued debt investor confidence in the E&Ps. The decline is even more encouraging when factoring in recent increases in the federal funds rate, which rose from 1.25% in September 2017 to the current 1.75%. Of the 45 companies, 18 had increases in the April 2018 average YTM compared with September 2017, but for the vast majority of the 18, the increase was 1% or less. For 24 companies, there was a decline in the April 2018 average YTM compared with September 2017, with the biggest declines concentrated in the high- and moderate-risk E&Ps. For 3 companies, there was no change in the April 2018 average YTM compared with September 2017.

For the 45 companies, average YTM rates for April 2018 and September 2017 remain higher than the average of 5.4% in 2014, when oil prices were trading at $100/bbl and balance sheets were more robust. But we consider the difference between the average YTM rate in April 2018 and that of

2014 to be of little concern, given the radical changes in commodity pricing, the evolutionary structural changes in the industry, and the rise in the federal funds rate.

We divided the 45 E&Ps into four groups according to amount of credit risk. Group 1 is high credit risk, containing the 6 companies with April 2018 bond yields above 10%. Ultra Petroleum’s YTM nearly doubled to 54% from September 2017, and Petroquest’s YTM increased by 1.9 percentage points. Callon Petroleum’s YTM nearly doubled to 11.7%, while W&T’s YTM was halved. For this

Key implications - continuedFor the companies with noninvestment-grade securities, the current average spread of 421 basis points is significantly lower than the average spread of 1,467 points that occurred in early 2016. The current average spread is higher than the 357 basis points in early 2014 and is in line with the 431 basis points in September 2017, the last time we did this report.

According to our analysis of debt repayment schedules based on 2017 year-end public filings for the Large, Midsized, and Small E&P subgroups, the amount of principal payments due has declined 15% on a rolling five-year basis, compared with 2015 year-end filings. This likely indicates that most of the companies have

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group, the average YTM increased from 19.4% in September 2017 to 21.4% in April 2018. Excluding Ultra’s extremely high, outlier YTM, the average yield for the high-risk group actually declined from 17.8% in September 2017 to 15.4% in April 2018.

Group 2 is moderate credit risk. For this group, average YTM in April 2018 declined from September 2017 for all companies, with rates falling to 8.1–9.6%. Denbury Resources’s average YTM declined the most, falling from 17.3% to 8.2%, followed by Comstock Resources, whose

average YTM declined from 14.8% to 9.5%. The average YTM for the group declined from 13.4% in September 2017 to 9.0% in April 2018.

Group 3, dominated by Midsize E&Ps, is low credit risk. For the group, the average YTM declined from 6.5% in September 2017 to 5.9% in April 2018. Most of the YTM changes were between 0.5 and 1.5 percentage points. Bill Barrett’s YTM decline was the greatest, falling by 3.5 percentage points, or about a third. Whiting Petroleum and Oasis Petroleum, both Bakken-focused, had YTM declines

Group 1

Company Ticker 2018 YTM 2017 YTM 2014 YTM

2018-2017 YTM

difference

2018-2014 YTM

difference

2017-2014 YTM

difference% Debt to cap

S&P credit rating

Gro

up 1

Ultra Petroleum Corp UPL 51.5 27.2 4.7 24.3 46.7 22.5 34% B+Halcon Res Corp HK 21.0 26.3 8.2 -5.3 12.8 18.1 81% B-Petroquest Energy Inc PQ 19.1 17.2 8.0 1.9 11.1 9.2 54% CCC+EP Energy Corp EPE 15.2 20.2 6.2 -5.0 9.0 14.0 91% NACallon Petroleum CPE 11.7 5.8 10.8 5.9 0.9 -5.0 191% BW&T Offshore Inc WTI 10.1 19.6 6.9 -9.5 3.2 12.7 53% CCC


Group 2


2018-2017 YTM

difference

2018-2014 YTM

difference

2017-2014 YTM


S&P credit rating

Gro

up 2

Sanchez Energy Corp SN 9.6 11.9 6.2 -2.4 3.4 5.8 101% BAthabasca Oil Corp ATH.TO 9.5 11.4 8.9 -1.9 0.6 2.4 26% B-Comstock Res Inc CRK 9.5 14.8 6.9 -5.3 2.6 7.9 17% CCC+Denbury Res Inc DNR 8.2 17.3 5.6 -9.1 2.6 11.7 32% CCC+Approach Resources Inc AREX 8.1 11.6 6.5 -3.5 1.7 5.1 16% NR


Group 3


2018-2017 YTM

difference

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difference

2017-2014 YTM


S&P credit rating

Gro

up 3

Gulfport Energy Corp GPOR 6.9 6.5 6.2 0.5 0.8 0.3 38% BB-Extraction Oil & Gas XOG 6.9 6.7 6.2 0.2 0.8 0.5 37% BBill Barrett Corp BBG 6.9 9.9 6.5 -3.1 0.3 3.4 N/A N/AChesapeake Engy Corp CHK 6.4 7.3 4.1 -0.9 2.3 3.2 44% BOasis Petroleum Inc OAS 6.0 7.6 5.7 -1.5 0.3 1.9 24% B+SM Energy Co SM 6.0 7.2 5.4 -1.2 0.6 1.8 32% BB-Hess Corp HES 6.0 5.1 3.7 0.8 2.2 1.4 23% BBB-Energen Corp EGN 5.9 5.5 4.9 0.4 1.0 0.6 22% BBPDC Energy Inc PDCE 5.7 5.9 6.3 -0.2 -0.6 -0.4 44% BB-Whiting Petroleum Corp WLL 5.6 7.4 4.5 -1.8 1.1 3.0 41% BB-Range Resources Corp RRC 5.6 5.6 5.0 0.0 0.5 0.6 42% BB+Laredo Petroleum Inc LPI 5.5 6.0 6.1 -0.4 -0.6 -0.2 51% B+Parsley Energy PE 5.3 5.3 6.7 0.0 -1.4 -1.4 21% NARSP Permian Inc RSPP 5.1 5.4 3.9 -0.3 1.2 1.5 26% B+QEP Res Inc QEP 5.0 5.7 5.0 -0.7 0.0 0.7 31% BB+




of 1.8 and 1.5 points, respectively, which might reflect investors’ assessment of improving economic conditions in the play.

Group 4, dominated by Large E&Ps with diverse asset bases, has the lowest credit risk. The average April 2018 YTM for the group is 4.3%, nearly identical to the September 2017 YTM of 4.2%. This group also has some established Permian (Diamondback, Pioneer and Concho) and Marcellus (EQT and Antero) operators, which have exposure to the best onshore US asset bases.

Energy bond yield spreads versus US Treasuries reinforce investor confidence

Proprietary IHS Markit energy debt indices, which track a broad array of fixed-income securities across the oil and gas value chain (midstream, services, rig operators) compared with US Treasuries, indicate debt investor confidence in oil and gas bonds. For investment-grade securities, the current spread of 146 basis points is significantly lower than the 377 points reached in February 2016, when WTI oil prices hit bottom. Even more encouraging, the current yield spread is lower than the 182 basis points in early 2014, when WTI oil prices were hovering around $100/bbl. Since our September 2017 report, the yield spread has remained the same, even though the federal funds rate has increased by 0.5 percentage points.

For noninvestment grade securities, the current spread of 421 basis points is significantly lower than the 1,467 basis points in early 2016. The current spread is higher than the 357 basis points in early 2014 and is line with the 431 basis points at the time of our September 2017 report. Since the September 2017 report, the yield spread has remained unchanged.

How long will rates remain low?

IHS Markit economists expect the federal funds rate to increase from the current 1.75% to about 3% at the beginning of 2019, before leveling off. As the Fed raises rates, bond prices would come under pressure, pushing yields higher and making it more expensive for companies to borrow money. How energy bond prices, yields and yield spreads react to rising interest rates is something we will be monitoring.

Anticipating rate increases, companies refinanced early and got ahead of rising borrowing costsNorth American E&P debt maturity schedules, as shown in year-end 2017, 2016, and 2015 annual filings, show that companies were proactive, refinancing debt and extending maturity dates. This was obviously prudent—not only because of weaker commodity prices, but also because the

Group 4


2018-2017 YTM

difference

2018-2014 YTM

difference

2017-2014 YTM


S&P credit rating

Gro

up 4

Antero Resource Corp AR 4.9 4.9 5.3 0.0 -0.3 -0.4 35% BB+

Diamondback Energy Inc FANG 4.9 4.8 6.1 0.1 -1.2 -1.3 21% BB

Noble Engy Inc NBL 4.7 4.3 3.9 0.4 0.8 0.4 26% BBB

Encana Corp ECA 4.6 4.6 3.8 -0.1 0.8 0.8 27% BBB-

WPX Energy Inc WPX 4.6 5.3 4.5 -0.7 0.0 0.7 38% BB-

Continental Res Inc CLR 4.5 5.3 4.5 -0.8 0.0 0.8 28% BBB-

Concho Res Inc CXO 4.5 4.6 5.3 -0.1 -0.7 -0.6 32% BBB-

ConocoPhillips COP 4.5 4.5 4.0 0.0 0.5 0.5 32% A-

Newfield Expl Co NFX 4.5 4.7 10.6 -0.2 -6.2 -6.0 40% BB+

Apache Corp APA 4.5 3.8 3.5 0.7 1.0 0.3 22% BBB

Anadarko Petroleum Corp APC 4.4 4.2 4.1 0.2 0.4 0.2 35% BBB

Cimarex Energy XEC 4.4 3.5 5.5 0.9 -1.1 -2.0 20% BBB-

Carrizo Oil & Gas Inc CRZO 4.3 6.6 7.2 -2.2 -2.8 -0.6 52% B+

Devon Engy Corp DVN 4.2 3.8 2.7 0.3 1.4 1.1 25% BBB

Suncor Engy Inc SU CN 4.1 3.7 3.7 0.4 0.4 0.0 35% A-

EQT Corp EQT 4.0 2.8 3.2 1.2 0.8 -0.4 34% BBB

Pioneer Nat Res Co PXD 3.7 2.8 2.6 1.0 1.2 0.2 44% BBB

Occidental Petroleum Inc OXY 3.7 3.1 2.4 0.6 1.3 0.6 7% A

EOG Res Inc EOG 3.6 2.7 2.2 0.8 1.4 0.6 17% BBB+




era of cheap money and low interest rates is expected to end, as shown in the US interest rate forecast chart.

Comparing 2017 with 2015 year-end filings, we calculate that, for the 45 North American E&Ps, total debt principal payment due, using a rolling five-year period, declined 15% overall. For the Small E&Ps, the decline in total

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principal debt due was a whopping 50%, likely indicating bankruptcies as well as refinancing. For the Midsized E&Ps, the decline was 17%. For the Large E&Ps, the decline was 4%.

Comparing 2017 with 2016 year-end filings, the total debt principal payment due, using the rolling five-year period,

rose 5%. For the Small E&Ps, total principal debt due declined by 8%. For the Midsized E&Ps, total principal debt due increased by 16%. For the Large E&Ps, the increase was 4%. The rise in total principal debt payment due for the Midsized and Large E&Ps indicates that the principal payments that were refinanced in 2015 will likely come due around 2022–23.

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Appendix

All Groups final

Company Ticker2018 YTM 2017 YTM 2014 YTM

2018-2017 YTM

difference

2018-2014 YTM

difference

2017-2014 YTM


S&P credit rating

Gro

up 1

Ultra Petroleum Corp UPL 51.5 27.2 4.7 24.3 46.7 22.5 34% B+Halcon Res Corp HK 21.0 26.3 8.2 -5.3 12.8 18.1 81% B-Petroquest Energy Inc PQ 19.1 17.2 8.0 1.9 11.1 9.2 54% CCC+EP Energy Corp EPE 15.2 20.2 6.2 -5.0 9.0 14.0 91% NACallon Petroleum CPE 11.7 5.8 10.8 5.9 0.9 -5.0 191% BW&T Offshore Inc WTI 10.1 19.6 6.9 -9.5 3.2 12.7 53% CCC

Gro

up 2

Sanchez Energy Corp SN 9.6 11.9 6.2 -2.4 3.4 5.8 101% BAthabasca Oil Corp ATH.TO 9.5 11.4 8.9 -1.9 0.6 2.4 26% B-Comstock Res Inc CRK 9.5 14.8 6.9 -5.3 2.6 7.9 17% CCC+Denbury Res Inc DNR 8.2 17.3 5.6 -9.1 2.6 11.7 32% CCC+Approach Resources Inc AREX 8.1 11.6 6.5 -3.5 1.7 5.1 16% NR

Gro

up 3

Gulfport Energy Corp GPOR 6.9 6.5 6.2 0.5 0.8 0.3 38% BB-Extraction Oil & Gas XOG 6.9 6.7 6.2 0.2 0.8 0.5 37% BBill Barrett Corp BBG 6.9 9.9 6.5 -3.1 0.3 3.4 N/A N/AChesapeake Engy Corp CHK 6.4 7.3 4.1 -0.9 2.3 3.2 44% BOasis Petroleum Inc OAS 6.0 7.6 5.7 -1.5 0.3 1.9 24% B+SM Energy Co SM 6.0 7.2 5.4 -1.2 0.6 1.8 32% BB-Hess Corp HES 6.0 5.1 3.7 0.8 2.2 1.4 23% BBB-Energen Corp EGN 5.9 5.5 4.9 0.4 1.0 0.6 22% BBPDC Energy Inc PDCE 5.7 5.9 6.3 -0.2 -0.6 -0.4 44% BB-Whiting Petroleum Corp WLL 5.6 7.4 4.5 -1.8 1.1 3.0 41% BB-Range Resources Corp RRC 5.6 5.6 5.0 0.0 0.5 0.6 42% BB+Laredo Petroleum Inc LPI 5.5 6.0 6.1 -0.4 -0.6 -0.2 51% B+Parsley Energy PE 5.3 5.3 6.7 0.0 -1.4 -1.4 21% NARSP Permian Inc RSPP 5.1 5.4 3.9 -0.3 1.2 1.5 26% B+QEP Res Inc QEP 5.0 5.7 5.0 -0.7 0.0 0.7 31% BB+

Gro

up 4

Antero Resource Corp AR 4.9 4.9 5.3 0.0 -0.3 -0.4 35% BB+Diamondback Energy Inc FANG 4.9 4.8 6.1 0.1 -1.2 -1.3 21% BBNoble Engy Inc NBL 4.7 4.3 3.9 0.4 0.8 0.4 26% BBBEncana Corp ECA 4.6 4.6 3.8 -0.1 0.8 0.8 27% BBB-WPX Energy Inc WPX 4.6 5.3 4.5 -0.7 0.0 0.7 38% BB-Continental Res Inc CLR 4.5 5.3 4.5 -0.8 0.0 0.8 28% BBB-Concho Res Inc CXO 4.5 4.6 5.3 -0.1 -0.7 -0.6 32% BBB-ConocoPhillips COP 4.5 4.5 4.0 0.0 0.5 0.5 32% A-Newfield Expl Co NFX 4.5 4.7 10.6 -0.2 -6.2 -6.0 40% BB+Apache Corp APA 4.5 3.8 3.5 0.7 1.0 0.3 22% BBBAnadarko Petroleum Corp APC 4.4 4.2 4.1 0.2 0.4 0.2 35% BBBCimarex Energy XEC 4.4 3.5 5.5 0.9 -1.1 -2.0 20% BBB-Carrizo Oil & Gas Inc CRZO 4.3 6.6 7.2 -2.2 -2.8 -0.6 52% B+Devon Engy Corp DVN 4.2 3.8 2.7 0.3 1.4 1.1 25% BBBSuncor Engy Inc SU CN 4.1 3.7 3.7 0.4 0.4 0.0 35% A-EQT Corp EQT 4.0 2.8 3.2 1.2 0.8 -0.4 34% BBBPioneer Nat Res Co PXD 3.7 2.8 2.6 1.0 1.2 0.2 44% BBBOccidental Petroleum Inc OXY 3.7 3.1 2.4 0.6 1.3 0.6 7% AEOG Res Inc EOG 3.6 2.7 2.2 0.8 1.4 0.6 17% BBB+


DisclaimerIHS Herold Inc. (“IHS Herold”), a wholly-owned subsidiary of IHS Markit Ltd., provides data and analysis on the strategy, performance, and valuation of companies in the global energy industry, as well as energy transactions and trends. IHS Herold serves a subscription client base consisting of energy companies, financial institutions, investment managers, and advisory firms. IHS Herold is not affiliated with any broker, dealer, bank, or investment bank. Companies mentioned in this report may be or may have been subscribers to IHS Herold data and research in the past year on terms consistent with all other clients of IHS Herold or clients of any member of the IHS Markit group. IHS Herold does not inform any company in advance of the nature or conclusions of its research reports. Analysts do not receive any compensation from the companies on which they report or from any other industry source.

Copyright © 2018 IHS Herold™. All rights reserved. Comparative Peer Group Analysis is published by IHS Herold, 200 Connecticut Avenue, Suite 3A, Norwalk, CT 06854, USA for the exclusive use of IHS Markit clients. Reproduction of this report, even for internal distribution, is strictly prohibited. The information contained herein has been obtained from sources believed to be reliable, but neither IHS Markit nor any of its affiliates guarantees their accuracy or completeness. No information or opinions contained herein constitutes a representation or solicitation for the purchase of any securities of the companies mentioned herein. From time to time, IHS Herold and/or its officers and employees may have long or short positions in the securities mentioned herein or during the past year may have transacted in securities of the companies mentioned.

The research analyst who prepared this report certifies that the views expressed herein accurately reflect his professional opinion, are consistent with established IHS Herold methodologies and standards, and that no part of his compensation was, is, or will be directly or indirectly related to specific views contained in this report.

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