Oil Companies Draw on Creative Financing to Stay Afloat After Prices Tumble

North America’s small and mid-sized energy companies are searching for creative ways to stay afloat as investors smell blood in the water from the almost 60 percent fall in the price of oil since June.

Oil and natural gas companies are straining for solutions before cuts in credit lines and increases in lending rates hit home in April, when banks re-price the collateral used to secure revolving credit lines. Some are turning to more creative forms of financing as familiar sources of money dry up.

That financing is coming from hedge funds, private equity shops and mega-wealthy investors like billionaire Carl Icahn who have the cash to weather a prolonged downturn and are on the hunt for deals among the wounded, bankers and analysts say. Oil operators, meanwhile, are laying off staff, freezing salaries and deferring investments to conserve cash.

“Companies have lived in a state of outspending cash flow, and the markets have facilitated that,” said Gregory Sommer, who runs energy investment banking at Deutsche Bank AG in New York. “But if prices persist at this level, you’re going to see some companies pulling back significantly” more than they already have.

Eclipse Resources Corp. turned to private equity investors in December after the cost to issue unsecured debt to fund capital spending became prohibitively expensive, according to Matthew DeNezza, the company’s chief financial officer.

“Traditional, high-yield debt markets were not available” at reasonable prices, DeNezza said in a telephone interview. “The debt markets were closed to us.”

77% Drop

Shares of the State College, Pennsylvania-based driller have fallen by 77 percent since it raised $818 million in its initial public offering on June 20, when U.S. oil prices were $107 a barrel. In a deal announced three days before the new year, Eclipse sold $325 million in additional equity to its largest investor, EnCap Investments, and brought in extra money from private-equity firm KKR & Co. to help fund drilling operations in 2015, DeNezza said.

Private equity investors, he said, can look past the market turmoil and “take a longer term view of what these assets are really worth.”

The firms have already raised $15 billion for general energy investing in recent years. Carlyle Group LP, Apollo Global Management LLC, Blackstone Group LP and KKR are raising billions more for new funds created in the past few months to invest in distressed oil producers.

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