Chevron bond deal to refinance debt
By Hillary Flynn
NEW YORK, May 13 (IFR) – Oil and gas producer Chevron had a tough time selling debt in the high-grade bond market this week in the wake of heavy supply, the weak performance of some newly minted energy bonds and a lack of conviction about the recent rally in the sector’s credits.
Chevron sold one of the biggest bond deals of this week – a US$6.8 billion issue to refinance existing debt. But in contrast to some other companies selling jumbo trades at the same time – including a US$7.8 billion transaction from AbbVie- it could not budge pricing during the book-building process.
Chevron priced the six-part deal at the same levels as initial guidance – an unusual occurrence in what is a relatively buoyant market for the majority of high-grade borrowers.
That left the company paying a high new-issue concession of about 20bp.
Some attributed the relatively poor outcome to its recent earnings. In a results announcement at the end of April, Chevron missed profit expectations and reported a net loss of US$725m, compared with a net profit of US$2.57 billion a year ago.
That led some on the buyside to demand more spread as compensation for what they still see as a precarious outlook for the sector.
Just a couple of weeks ago, ExxonMobil lost its prized Triple A rating and others in the sector have also released dismal results as a rally in oil prices came too late to boost earnings.
At the same time, some oil heavyweights are still carrying out shareholder-friendly activities to the detriment of bondholders. Chevron, for example, has maintained its dividend throughout despite the sector’s woes.
“Chevron is not generating any cash right now, and its dividend tends to be top priority,” Matt Brill, portfolio manager at Invesco, told IFR.
“It is very focused on its equity holders.”
Sour secondaries
Chevron may also have come up against some price sensitivity after heavy supply from other companies in the sector.
A raft of oil heavyweights including BP, ConocoPhillips, ExxonMobil and Shell have sold bonds in the last few weeks – but a fair number of them have widened in the aftermarket.
Shell International’s US$7.25 billion four-part deal, which was priced earlier this month, has left some investors particularly wary.
The three longest-dated tranches are all trading wide of their re-offer prices in secondary, and Shell’s 1.75 billion bond this week, split between eight and 12-year tranches, has not fared much better.
Like the US dollar bond, the euro bonds quickly soured in secondary trading, with the longer tranche widening by 3bp.
“What stopped Chevron’s books from really exploding is Shell not doing that well in the secondary, and everyone had thought Shell would [perform well],” one investor said.
Shell reported its lowest annual income in more than a decade during its latest earnings report in February 2016 as its income fell by 87% to US$1.94 billion.
Other deals have also failed to perform in secondary trading, including BP Capital Market’s US$1.25 billion 10-year trade, which was priced at Treasuries plus 130bp at the end of April and is 1bp wider now.
That is despite BP attracting a US$9.8 billion book at the time of the sale, which included a US$750m three-year tranche.
BP had a tough first quarter, reporting an 80% drop in profits just before the bond sale.
Push-back
Some of the investor push-back to Chevron’s deal is also because of a lack of conviction in the current rally in energy sector spreads following the uptick in oil prices.
US crude was trading up at US$46.5 a barrel on Thursday – some US$10 higher than it was a month ago. And thanks to this increase, average energy spreads are now 14bp tighter since the start of April and a whopping 164bp tighter since wides of Treasuries plus 403bp on February 11.
“People need to ensure they are compensated for the risk they are taking on,” said Paul Suter, a fixed-income trader at ECM.
(Reporting by Hillary Flynn; Editing by Natalie Harrison and Shankar Ramakrishnan)