Qatar became the latest Gulf Cooperation Council country intending to tap international bond markets with a planned $5 billion bond. If it is launched, it will be the first bond from the country since 2011. With the drop in oil prices, countries across the region are turning to the debt markets. Bloomberg reports that Qatar will run a $13 billion budget deficit in 2016. Last week, Abu Dhabi raised $5 billion from its first bond sale since 2009. Reuters reports that Qatar has already borrowed $5.5 billion through a bank loan concluded in January 2016. Proceeds from this bond will likely be used to repay this bridge financing. Qatar 10-year yields are currently around 2.45%, according to tradingeconomics.com. (For more see: How Petro Economies Are Coping with $40 Oil.)
$50 Oil Seems To Be A Trigger Price
Devon Energy (DVN) CEO Dave Hager said on its conference call with Wall Street analysts to discuss 1Q16 earnings results that the company could start adding incremental drilling activity if oil prices hit $50 a barrel and could double capital spending if they reach $60, according to Reuters. His comments fall in line with a series of other CEO’s who indicated recently that oil prices around $50 could trigger a renewal of US shale oil production. Investor’s Business Daily reports that Pioneer Resources (PXD) said last week it would add five to ten drilling rigs when oil hits $50 per barrel. This has also led to speculation that companies will attempt to lock in hedges at these higher prices, which will allow them to continue producing even if oil prices fall again. This could result in the oil price falling quite rapidly in H216 since supply would not be scaled back quickly.
S&P Reacts to Halliburton (HAL) & Baker Hughes (BHI) Deal Collapse
This week S&P Global, a credit rating agency, lowered the corporate credit rating of Halliburton to ‘A-‘ from ‘A’ and placed the rating on Negative CreditWatch, according to the agency’s press release. S&P go on to say, “The downgrade reflects the removal of a positive comparative rating analysis, which had reflected the benefits to Halliburton’s overall credit quality from the combination with Baker Hughes.” At the same time, S&P affirmed the ‘A’ corporate rating of Baker Hughes and assigned a Stable Outlook “reflecting our expectation that Baker Hughes will continue a modest financial policy while pursuing cost reductions that have been prohibited while the merger agreement was in place.” S&P acknowledged that Baker Hughes will pay down debt from the $3.5 billion termination fee they received from Halliburton as a result of the deal being cancelled. S&P say they expect funds from operations (FFO)/debt to average about 60% or better by the end of 2017 and for debt/EBITDA of 2x or less. (For more see, How Baker Hughes Will Use $3.5B Breakup Fee from Halliburton.)
Crude Oil Inventories Still Rising
US crude oil inventories rose more-than-expected for the week ending April 29, official data from the US Energy Information Administration (EIA) showed on Wednesday. Analyst expectations were for an inventory build of 1.695 million barrels. Instead inventories rose by 2.784 million barrels. The chart below shows the change in crude oil inventory for the 12 months, and that they have been rising over the course of 2016.
Oil prices are up nearly 18% year-to-date in 2016 on expectations that the current global oil oversupply will decline and markets will rebalance in 2H16. This belief is partly driven by US EIA data showing that US domestic oil production is beginning to slow. In the meantime, the market continually ignores rising US inventories, which is evidence of continuing oversupply. Things don’t look much better on the international stage either. Bloomberg reported this week that OPEC is sleepwalking into its June meeting without a plan for supply limits. (For more see, The Economics Of U.S Crude Oil Storage Capacity.)
Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice.
Originally Posted at Investopedia: Gulf States Tap Bond Markets, $50 Oil a ‘Trigger’ | Investopedia