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Oil Companies Stock Up On Cash Ahead Of An Uncertain Future

THE WALL STREET JOURNAL

JUNE 25, 2010

By Chris Dieterich Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Oil giants are ramping up their borrowing, braving higher interest rates in order to lock down funding as a hedge against further turmoil in their industry or in credit markets, traders and analysts said.

Facing possible further legislative or market turmoil from the ramifications of BP PLC’s (BP, BP.LN) efforts to deal with an oil spill in the Gulf of Mexico and the need to refinance current bond offerings when they come due later this year, companies in the energy sector are trying to get their balance sheets in order now in case credit markets tighten further in the future.

Worldwide, oil and gas companies have taken out $83.3 billion in loans so far this year, a 41% increase over the same period in 2009, according to data provider Dealogic. Most of it–$53.3 billion–has come in the second quarter, the busiest quarter since before credit markets froze in 2008.

Energy companies also are tapping the bond market. Globally, they have sold $29.1 billion worth of bonds since late April, when the Deepwater Horizon rig BP leased from Transocean Ltd. (RIG, RIGN.VX) blew up and sank in the Gulf of Mexico. More than the $25.7 billion were sold in the first 3 1/2 months of 2010.

Shell International Finance BV, a unit of Royal Dutch Shell PLC (RD, RDSA), sold $2.75 billion of bonds on Monday. Total Capital, the finance arm of French oil titan Total SA (TOT, FP.FR), sold $2.5 billion in notes last week. Petroleos de Venezuela SA’s Citgo Petroleum Corp. unit sold $300 million of bonds last week as part of a $2.1 billion refinancing that also included a new three-year $750 million revolving credit facility, a five-year $350 million term loan and a seven-year $700 million term loan, according to a company news release.

Citgo didn’t comment further about its refinancing. Shell offered no comment about the timing of its most recent bond sale. Total didn’t respond to an inquiry.

There was strong investor demand for each of these debt sales, said Andrew Karp, head of investment-grade bond syndicate at Bank of America Merrill Lynch, which was an underwriter for the Total and Shell deals.

One reason investors were eager to buy was that they saw a reasonable value, Karp said. Risk premiums, or spreads, on oil-companies’ debt–the extra yield investors demand to buy company bonds rather than less-risky Treasury securities–have risen around 0.90 percentage point since the Gulf spill began.

Composite oil- and gas-sector credit spreads have stretched from 2.43 percentage points over Treasurys on April 28 to 3.35 percentage points Thursday, according to Standard & Poor’s.

Wider spreads normally would encourage issuers to postpone borrowing until costs came down, but oil companies are eager to borrow while they can. One concern is that further problems with BP’s spill could further sour investor attitudes toward energy companies.

Those worries were stoked on Wednesday, when a remote-controlled robot knocked into a containment cap over the well, prompting its temporary removal and delaying operations to divert oil to ships on the surface. Other failures to stop the leak pose risks to the credit environment of industry players.

“In late July, if there’s noise that the relief wells aren’t working, the energy space could be a lot wider and [oil companies] will likely try to get ahead of that,” said Justin D’Ercole, head of Americas investment grade syndicate at Barclays Capital.

Oil companies that need to refinance outstanding debt over the next few years also will be eager to sell bonds soon, said Thaddeus Strobach, credit strategist at Royal Bank of Scotland. Stobach said he expects additional oil-company issuers to market bonds in the coming weeks.

“We do not know ultimately what legislation and governmental restrictions will shake out,” Strobach said. “[Oil companies] feel it’s more important to have their [financial] house in order than to have to deal with the unexpected.”

-By Chris Dieterich, Dow Jones Newswires; 212-416-2611; [email protected]

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