Ultra, Midstates filings push up energy default rate; oil and gas bonds trend lower with crude prices

By Stephanie N. Rotondo

Seattle, May 2 – Distressed oil and gas bonds continued to struggle on Monday, as two more producers sought bankruptcy protections and domestic crude prices fell under $45 a barrel.

Ultra Petroleum Corp. filed for Chapter 11 late Friday. Another filing on Saturday followed, this one from Midstates Petroleum Co. Inc. The latest casualties of waning commodity prices added $3.1 billion of debt to the high-yield bond default volume tally, according to Fitch Ratings. They also increased the default level for the energy space to 13%, a new record to the over 9.7% default rate seen in 1999.

For its part, domestic crude was down 2.22%, falling under $45 a barrel as OPEC reported that its production rose to 32.64 million barrels per day in April, almost hitting the most recent highs.

April also saw a rise in exports from Iraq, as well as Russia.

Still, market participants are hoping that there are signs the oil space is in process of naturally rebalancing, especially as U.S. active rigs fell again last week – the sixth consecutive decline, according to Baker Hughes – and non-OPEC production was expected to experience its biggest production decline in nearly two decades.

But while most of the sector was moving downward, Ultra and Midstates’ bonds were improving.

A trader said Ultra’s 6 1/8% notes due 2024 were “a little higher,” trading near 18. Midstates’ 10% second-lien notes due 2020 were meantime trading up to a 53 to 54 context, which compared to previous levels in the mid-40s, the trader said.

As for the day’s downers, a market source saw Chesapeake Energy Corp.’s 6 5/8% notes due 2020 dropping nearly a point to 61¼.

In the land of distressed preferred stock, Legacy Reserves LP’s 8% series B fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYO) were down 83 cents, or 13.45%, at $5.34. The 8% series A fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYP) were off 93 cents, or 15.05%, at $5.25.

Breitburn Energy Partners LP’s 8.25% series A cumulative redeemable perpetual preferred units (Nasdaq: BBEPP) were meantime seen falling 16 cents, or 7.48%, to $1.98.

The securities are currently not paying distributions.

Steel names dip

United States Steel Corp.’s bonds were also weaker for the day, as the company began shopping around $500 million of five-year senior secured paper.

At one shop, the 7% notes due 2018 were seen at 102 bid, down half a point.

However, another source said the short-dated issues were “up on the prospects of being taken out with a new secured deal.”

Proceeds from the new deal will be used to refinance upcoming maturities. The 7% notes are expected to be one such issue.

Meanwhile, sector peer AK Steel Holdings Corp. was also down, continuing a trend seen on Friday.

A source placed the 7 5/8% notes due 2020 at 84½ bid, down a point.

Another trader also deemed the debt lower, seeing the 7 5/8% notes due 2021 trading “around 80.

“So they were down a couple points today, off about 5 points from last week’s highs.”

AK Steel priced a $229 million stock offering on Friday, the proceeds of which will be used to pay down the $520 million outstanding under its $1.5 billion asset-based revolving credit facility.

The West Chester, Ohio-based steel producer sold 52 million shares of common stock at $4.40 a share – a 12% discount to Thursday’s closing share price of $4.99 (NYSE: AKS).

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