OREANDA-NEWS. Asset sales by high yield exploration and production companies (E&Ps) are likely to pick up in a lower-for-longer low oil price scenario, according to Fitch Ratings. Sales of assets are one of the key remaining self-help measures available to high yield companies that have been shut out of capital markets. Asset sales can provide bridge liquidity and be used to repay revolver borrowings.

We believe that absent the capital markets re-opening again at reasonable levels, distressed high yield management will come under increased pressure to sell key assets in order to generate liquidity. This is especially true in the case of high yield E&Ps with significant drawings on their secured revolvers, as we anticipate lenders looking to manage their exposure to the sector may continue to put pressure on select companies to come up with plans to pay down balances.

Many North American E&Ps have aggressively adjusted their cost structures downward through several rounds of capex cuts, headcount reductions, and rig releases in an attempt to reduce the free cash flow deficits created by sharply lower oil prices. This trend has continued through the third-quarter earnings season, with many independent E&Ps announcing additional capex and cost cuts to accommodate weak forward pricing outlooks.

Earlier this year, when access to the capital markets eased briefly for high yield E&Ps, a number of companies issued equity and hybrid instruments, along with incremental secured debt (second and third lien). That window has since closed and capital markets are once again largely shut for high yield E&P, making self-help measures more important than ever to maintain liquidity.

Several high yield E&Ps have already used asset sales to repay lenders. These include PetroQuest Energy, which sold off its interests in the Woodford and Mississippi Lime and used part of the proceeds to repay bank facility borrowings in June; EV Energy Partners, which divested a 21% stake in Utica East Ohio Midstream to a subsidiary of Williams Partners in June for total cash consideration of $575 million and used a significant portion of proceeds to repay borrowings outstanding on its revolver; and Resolute Energy Corporation, which repaid revolver borrowings using proceeds from the sale of its Powder River Basin assets for $55 million in October.