Macro Corporate Credit Theme – North American Unconventional Resource Corporate Credits

March 23, 2012

1.Large Integrated Global Oil & Gas Companies have refocused their efforts on the North American land based unconventional resource plays.  These include the following basins: Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara and Barnett Shale.

2.Major corporate transactions have occurred in the past three years verifying valuations:

  • BHP recently acquired Petrohawk
  • Marathon Oil (MRO) acquired the Eagle Ford assets of Hill Corp
  • Exxon acquired XTO
  • Chevron acquired Atlas Energy

3.Technology advancements pioneered by Devon Energy (DVN) and Chesapeake (CHK) in horizontal drilling and fracturing of shale formations have resulted in the lowering of the risk drilling and increased the recoverable oil and gas from formations.

4.Independent Oil & Gas Companies have been at the forefront of this trend which include the following Corporate Credits:

  • Range Resources Corporation (RRC) Market Cap. $10.4b, Corp. Rating Ba3/BB
  • Pioneer Natural Resources Company (PXD) Market Cap. $8.7b, Corp. Rating Ba1/BB+
  • Chesapeake Energy Corporation (CHK) Market Cap. $20.0b, Corp. Rating Ba3/BB+

5.These companies have the following characteristics:

  • Asset bases that are appreciating in terms of transfer value
  • Ability to generate higher returns on capital employed
  • Ability to attract additional low cost capital through joint drilling ventures (farm outs)
  • Upgrade potential

6.Oil & Gas Service Companies are benefitting from the resurgence in drilling:

  • U.S. North American land-based drilling rig count has increased from 900 in the summer of 2009 to 1,958 as of Sept. 8, 2011 (Baker Hughes Rig Count).
  • Service intensity has increased.  Pressure pumping in North America used to fracture wells is projected this year 2011 to have its best year ever with $40 billion of revenues rising to $48 billion in 2012 according Spears & Associates.
  • Increase in Fracturing Stages Resulting from Horizontal Drilling Activity
  • Increased Service Intensity and Activity in More Demanding Shale Reservoirs.
  • An increase in the oil-directed horizontal rig count

7.On September 9, 2011 Frac Tech International, LLC filed for an Initial Public Offering. The following quote from the prospectus highlights the activity in the industry “Our revenues have grown from $214.4 million in 2006 to $1,286.6 million in 2010, a compound annual growth rate of 56.5%. For the six months ended June 30, 2011 our revenues were $1,096.4 million and our Adjusted EBITDA was $453.5 million, representing increases of 143% and 178%, respectively, compared to the six months ended June 30, 2010. We are benefitting from a number of positive industry developments, including a dramatic increase in the amount and efficiency of horizontal drilling activity, an increase in the number of hydraulic fracturing stages per well and an increase in drilling activity in oil- and liquids-rich shale formations. These trends have led to increased asset utilization in our industry and a tight supply of fracturing fleets, proppants and other fracturing-related services and products. We also believe there is growing international interest in horizontal drilling and fracturing methods.”  Frac Tech filed an IPO earlier in the year and an investment group controlled by Temasek, an investment arm of the Singapore Government, acquired 74.2% of the Company from Chesapeake and management. The IPO was refilled on September 9, 2011.

Unconventional Resource Map

Selected Corporate Credits