Bond market improves slightly for energy companies

Ann de Rouffignac
OGJ Online

HOUSTON, Jan. 8, 2002 — Energy marketers appear to be recovering from December’s panic attack brought on by Enron Corp.’s unexpected collapse, analysts said Tuesday.

Energy companies are generating some interest from investors and portfolio managers in the bond market, they said. Pushed by credit ratings agencies to boost liquidity and shore up the balance sheet Williams Cos. Inc. was in the market Tuesday selling billions of dollars of long-term debt. Less than 2 weeks ago, the Tulsa-based energy company said it planned to rebuild its balance sheet after Enron filed for bankruptcy protection from creditors Dec. 2, leaving the entire energy sector licking its wounds.

“We haven’t seen trauma like this since the early 90s when a few pipelines went bankrupt,” said John Olson, analyst with Sanders Morris Harris, Houston.

Ratings agencies such as Moody’s Investors Service Inc. lowered ratings and issued new and tougher guidelines with respect to liquidity and debt requirements. The resulting sell-off forced debt-laden companies to strengthen their balance sheets given the poor energy pricing fundamentals affecting the sector.

Enron’s high profile collapse helped bring the bond market for other energy companies to its knees in late 2001 as investors tried to digest what happened, analysts said. But today the bond market is more receptive to energy companies.

Bonds improved
“The bonds in the group across the board have improved,” said Jon Cartwright, bond analyst with Raymond James & Associates. “The panic is over and the utility portfolio managers are back.”

Spreads between buy and sell orders are narrowing again, he said. Every debt offering coming to market now is sold in amounts sometimes larger than originally intended.

“Now it’s a matter of how big the deal will be,” Cartwright said. “Not how difficult it will be to sell it.”

Williams is selling $1 billion of mandatory convertible debt securities in order to maintain its investment-grade credit rating, the company said. The debt has a term of 5 years and the contract requires the company to deliver Williams’s common stock to holders after 3 years at an agreed rate instead of cash.

Williams will use the proceeds to pay down its short-term debt and commercial paper. The advantage of this kind of offering is it doesn’t burden the company’s balance sheet with principal that will be due in cash.

“The psychology is better but the fundamentals are worse,” said Olson. “A recession is still a recession. Corporate profits are down 20-30%.”

Olson predicted the sector will continue to react to collateral damage from Enron. The companies must go to the market because the ratings agencies’ reaction to the Enron debacle “raised the goal post and moved the end zone.”

With a borderline investment grade credit rating, Williams’s offering “is a good thing,” Olson said. “It’s better to be at 50- 55% leverage (total debt to capital) than 60- 65%.” Williams is selling its debt at yields of about 8-9% which is still very expensive, said Gerry Keenan, consultant with PriceWaterhouseCoopers Consulting in Chicago.

“You can sell almost anything at a high enough price,” he said.

Olson said Williams still is grappling with $1 billion in losses at its communications unit in the first 9 months of 2001. “The parent is on the hook for $1.4 billion in debt from the communications company and some operating leases that are capitalized at about $700 million,” he said.

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