Rosetta increases debt but lowers rates, pushes out debt maturities

By Paul Deckelman

New York, Aug. 5 – Rosetta Resources Inc. increased its total debt load during the 2014 second quarter but was able to lower its overall interest rate and push out all of its debt maturities into the next decade by doing so.

During the Houston-based oil and natural gas exploration and production company’s Tuesday conference call following the release of its quarterly results, its executive vice president and chief financial officer, John E. Hagale, noted the key financial transaction that took place during the quarter, its issuance of $500 million of new 5 7/8% senior notes due 2024. Those notes priced at par in a quick-to-market transaction on May 21. The issue was upsized from an originally announced $400 million.

Proceeds from the new deal were used to repay all outstanding borrowings under Rosetta’s revolving credit facility, including monies used to redeem the company’s $200 million of outstanding 9½% senior notes due 2018 on May 5 at a price of 104.75 plus accrued interest. The company paid a total of $210.6 million, including a call premium of $9.5 million and $1.1 million of accrued interest.

The remaining proceeds were earmarked for general corporate purposes.

Bond deal boosts debt

According to Rosetta’s Monday filing with the Securities and Exchange Commission of its 10-Q report covering the second quarter, the transactions left Rosetta with $1.8 billion of long-term debt at the end of the quarter on June 30, up from $1.56 billion at the end of the first quarter on March 31. Long-term debt had stood at $1.5 billion at the end of the 2013 fiscal year on Dec. 31 and was $1.09 billion at the end of the 2013 second quarter.

Besides the $500 million of new 2024 notes, the capital structure as of June 30 included $700 million of 5 5/8% senior notes due 2021 that were sold in in May 2013 and $600 million of 5 7/8% senior notes due 2022 issued last November.

Rosetta’s weighted average borrowing rate at June 30 was 6.04%, inclusive of interest and commitment fees, down from 6.26% on March 31 though up from 5.99% at year’s end and from 5.63% a year ago.

The company’s capital structure also includes the credit facility, but after repayment of the outstanding amounts using the proceeds from its latest bond deal, there were no revolver borrowings outstanding as of June 30, and availability was $800 million.

The company and its lenders had agreed in early April to authorize the redemption of the 9½% notes, to increase the borrowing base of the revolver to $950 million from $800 million and to reconfirm the committed amount under the facility at $800 million, with a maximum credit amount of $1.5 billion.

As of the end of the quarter, the company’s leverage ratio of total debt as a multiple of trailing 12-month EBITDA stood at 2.8 times, inside the permitted maximum level of 4 times contained in the credit facility covenants. The company is also required to keep a minimum current ratio of consolidated current assets, including the unused amount of available borrowing capacity, versus consolidated current liabilities, excluding certain non-cash obligations, of at least 1 to 1. At the end of the quarter, the ratio was 2.9 to 1.

Net earnings decline

At the end of the quarter, cash and equivalents stood at $28.19 million, versus $55.11 million at the end of the first quarter, $193.78 million at the end of 2013 and $19.81 million for the year-ago second quarter.

Second-quarter revenues dipped to $220.89 million from $236.52 million a year ago.

Net interest expense was $17.32 million, up from $15.29 million for the first quarter and $13.09 million for the year-earlier period.

The company’s net income for the latest quarter was $14.44 million, or 23 cents per diluted share, down from $75.35 million, or $1.27 per share, in the year-ago quarter.

Hagale told analysts on the conference call that the drop in net income was primarily attributed to increased depreciation, depletion and amortization costs, increased interest expense and a higher realized loss on derivatives the company uses to hedge against volatile changes in oil, natural gas and natural gas liquids prices, partially offset by the higher production and higher realized prices for its output.

Its adjusted net income was $50.46 million, or 82 cents per share, down from the year-earlier $52.31 million, or 88 cents per share.

Hagale noted that the adjusted net income figure excluded, among other things, a $13 million loss on debt extinguishment from the redemption of the 9½% notes.

Besides Hagale, the company’s chairman, president and chief executive officer, James E. Craddock, and its executive vice president and chief operating officer, John D. Clayton, also did formal presentations on the call. Despite the less-than-stellar earnings numbers, Craddock noted the company’s operational progress in drilling for oil and gas in the Delaware Basin, part of the larger Permian Basin region of western Texas, and in the Eagle Ford Shale formation in southern Texas.

Craddock called the first six months of 2014 “a productive time for Rosetta” and said that “we remain on track to meet or exceed our objectives for the year, and we're looking forward to maintaining that momentum into 2015.”

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