Chevron Corp. (NYSE: CVX) plans to sell as much as $6 billion of bonds as investors seek debt of energy producer’s that can weather the downturn, Bloomberg reported Feb. 24.
It would its biggest offering since oil prices plunged 53%.
The company may issue the securities as soon as Feb. 24, according to a person with knowledge of the transaction who asked not to be identified, citing lack of authorization to speak publicly. Proceeds will be used to refinance short-term borrowings, known as commercial paper and for general corporate purposes, according to Standard & Poor’s, which rated the debt AA.
While Chevron has seen its stock price fall 18% since the start of the oil rout, forcing it to suspend share buybacks for 2015, the bond market has been kinder. Debt of the riskiest energy companies yield 4.68 percentage points more than securities of investment-grade issuers like Chevron, which is more than twice the premium demanded before the oil sell off.
“There has been a real bifurcation of the market, and high quality energy names like Chevron have been almost completely insulated from a debt stand point,” Thomas Murphy, who oversees about $26 billion of corporate bonds at Columbia Management Investment Advisers LLC in Minneapolis, said in a phone interview. “They have a lot of flexibility, a long-term view, and at the end of the day they will pay the money back.”
Relative Yields
Chevron is proposing to sell $1.75 billion of five-year notes as part of the offering at a yield of 50 basis points more than similar maturity Treasuries, the person said. That’s a 16 basis-point premium to the expected yield based on secondary prices of the company’s existing bonds Monday, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Chevron is accelerating spending cuts that got under way last year as falling crude prices eroded cash needed for exploratory drilling, platform construction and other capital projects. The San Ramon, California-based company last month said it plans to reduce outlays by 13% this year to $35 billion, more than three times the 3.7% cut during 2014.
Today’s planned sale would be Chevron’s first bond deal since it issued $4 billion of debt in November, Bloomberg data show.
“If they see a once-in-a-lifetime investment opportunity, they don’t want to be stuck in a situation where interest rates rise,” Fadel Gheit, an analyst at Oppenheimer & Co., said in a phone interview. “They are going into this bond offering to give themselves maximum financial flexibility,” said Gheit, who cut Chevron stock to perform from outperform Tuesday.
Moody’s Investors Service rates the energy company’s proposed notes an investment-grade rating of Aa1.
“The company entered this period of weak oil prices with low financial leverage, competitive capital returns, and a more restrained approach to shareholder rewards compared to its peers,” Peter Speer, Moody’s senior vice president wrote in a note to clients. The sale will help sustain “the company’s liquidity while it funds major capital projects through this period of low oil prices.”
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