Rig Bond Distress Seen Subsiding as Oil Bounce Produces Windfall

Rig Bond Distress Seen Subsiding as Oil Bounce Produces Windfall

By Isabella Cota/Bloomberg

10:00 PM BRT
April 28, 2015

The rise of Mexico’s rig operators from the depths of distress is turning into a boon for bond investors.

Offshore Drilling Holding’s $950 million of notes due 2020 have returned 11 percent this month alone, almost four times the emerging-market average for junk bonds. Oro Negro Drilling Pte. Ltd.’s bonds have also outperformed, gaining 7 percent.

After being rocked by crude’s collapse at the start of the year, the rig operators are regaining investor confidence as oil prices jump by the most since 2008 and the companies lock in platform-leasing rates that preserve their ability to pay debt. In January, Offshore Drilling’s bonds yielded almost 20 percentage points more than Treasuries — double the threshold for securities considered distressed. It’s now about half that.

“It’s fair to say that the worst is behind us,” Jason Trujillo, an analyst at Invesco Ltd., said from Atlanta.

While state oil producer Petroleos Mexicanos, the biggest client of Offshore Drilling and Oro Negro, cut the day rates it pays for rigs by as much as 40 percent to $125,000, Reforma newspaper said April 15, Invesco and InSight Securities Inc. say the levels are still high enough for the companies to pay its debt.

Pemex’s press office declined to comment on the Reforma article and said that negotiations with rig operators are ongoing. It also said existing contracts won’t be canceled.

Neus Bohigas, a spokeswoman for Oro Negro, declined to comment on the day rates and the company’s bond performance.

Raschid Mohamed, the head of investor relations at Offshore Drilling’s Mexico City-based parent Grupo R, didn’t reply to an e-mail seeking comment.

Oil Soars

Crude prices have soared 16 percent in April, the biggest monthly surge since May 2008, to $57.01 a barrel. Mexico’s peso has fallen 0.1 percent to 15.2774 per dollar.

Oro Negro’s $725 million of bonds due 2019 now yield 14.1 percentage points more than Treasuries, down from 19.61 percentage points in January. That compares with a premium of 10.02 percentage points for Offshore Drilling’s notes.

“The defining factor in this was the contracts,” Carlos Legaspy, who owns Offshore Drilling bonds as part of the $350 million in emerging-market debt he oversees as the chief executive officer of InSight Securities, said by telephone. “The deal was not too bad.”

He said Offshore Drilling’s bonds will climb to 90 cents on the dollar from 87.76 cents. The company provides three of Pemex’s four ultra-deepwater rigs.

“While it used to be a higher number for the day rates, just having something agreed to is critical for the long-term viability of the business,” Invesco’s Trujillo said.