Oil Producers Not Alone in Downturn

Posted on March 31, 2016 by Anthony Jerdine

Oil Producers Not Alone in Downturn
By Anthony Jerdine | March 30, 2016

Much is written about the plight of shale oil producers stemming from the downturn in oil prices. Forty-two oil companies declared bankruptcy in the U.S. in 2015, according to Haynes and Boone, and management consulting companies like Deloitte predict much more will experience the same fate in 2016. (For more, see: 5 Energy Companies Crushed by Low Oil in 2016.) Oil producers are not the only ones suffering in the oil downturn. Many other sectors related to oil production are also facing challenges as the number of Exploration and Production (E&P) companies declaring bankruptcy grows.

Midstream Companies
Oil transportation companies, also known as midstream companies, are feeling the pressure of low oil prices. E&P companies, or upstream companies, are hoping to exit deals made with these midstream transportation companies as oil producers seek bankruptcy protection under Chapter 11 restructuring, reports Oil & Gas 360. It is an unusual move because these transport contracts are usually unbreakable and remain in place even after production is sold to a new owner post-bankruptcy. In this lower oil price environment; however, upstream companies that are burdened with high debt loads are seeking alternative ways to free themselves from other financial obligations to provide more flexibility during bankruptcy proceedings.

This is a real headache for midstream companies that negotiated transportation contracts when oil prices were significantly higher than they are today. Bankrupt E&P companies are no longer able to pay previously negotiated prices and are trying to cancel pipeline contracts to clear the way for possible acquisition deals. For example, Quicksilver Resources Inc. is seeking to cancel its pipeline transportation contract with Crestwood Midstream Partners LP(CEQP) by March 31 to close the sale of its U.S. assets to BlueStone Natural Resources for $245 million, Reuters reports.

In another deal, Sabine Oil & Gas filed a motion in court to cancel its midstream contracts. Sabine argued that it “could not deliver the required minimum amounts of gas and condensate and that rejection would save Sabine as much as $115 million,” according to the law firm Jones Day. Fitch Ratings, a credit rating agency, said in a press release related to Sabine Oil & Gas’s motion to cancel its contracts with the midstream service providers that “counterparty risks continue to be a concern for the midstream service space given expectations for continued E&P bankruptcy activity.”

Offshore Drillers
Another sector that is under a lot of pressure is the offshore drilling sector. Moody’s, another credit rating agency, says the offshore drilling industry is going through a severe cyclical downturn, and the agency expects day-rates to remain depressed over the next several years because of low producer spending and rig oversupply.

Paragon Offshore plc filed for bankruptcy on February 15, affecting $2.4 billion worth of debt, according to Moody’s. Paragon joins several other energy companies that have sought creditor protection amid the oil rout. Hercules Offshore Inc., the owner of the largest fleet of shallow-water drilling rigs in the Gulf of Mexico, said Feb. 11 that it’s exploring strategic alternatives — just three months after emerging from bankruptcy, Bloomberg reports.

At the end of February, Moody’s concluded rating reviews on six U.S. offshore drilling companies. Moody’s downgraded two companies’ ratings three notches, three companies’ ratings four notches and one company’s rating (Ensco plc) five notches to B1 from Baa2. The sharp downgrade reflects Moody’s view that Ensco’s leverage will increase to very high levels as more of its rigs roll off contracts in an extremely challenging offshore contract drilling market.

Multiple notch rating moves are rare for the rating agencies and are usually reserved for industries or companies under considerable financial strain.

Rig Contractors
Rig contractors have suffered the double blow of declining customer demand due to tumbling oil prices and a glut of vessels that continue to be built to meet orders made before the rout, Rigzone reports. Transocean Ltd. (RIG) leads the industry in reducing its fleet, with 24 rigs scrapped since the downturn began and it could retire another eight to ten over the next year to 18 months. In the meantime, Schlumberger (another oil industry service provider) said it’s not expecting a meaningful recovery in its own activity until next year.

Bank Loan Exposure
Debt has fuelled the shale boom, but as prices fell, companies that borrowed too much have started to find themselves under strain. This is also putting pressure on the banks that lent to these companies to fund the expansion. IMF economists warned in February that commodity price shocks could weaken banks in developing economies. It is not just regional banks in the US that are feeling the pain—big international banks have exposure to the oil sector too.

As an example, bankrupt Paragon Offshore mentioned earlier, has debt that includes $708 million due under a revolving credit agreement and $642 million due under a secured term loan, both organized by JPMorgan Chase Bank, Bloomberg reports. As a result, several major banks are reducing their exposure to the energy sector by attempting to sell off souring loans, declining to renew them or clamping down on the ability of oil and gas companies to tap credit lines for cash, the Wall Street Journal reports.
It is not just production companies that are hurting from the drop in oil prices. Everyone from businesses that sell ancillary services such as transportation to the banks that finance the industry is feeling the effects of low prices. If oil prices stay at depressed levels for an extended period, then the number of companies filing for bankruptcy is likely to rise and will extend beyond just the upstream producers.

Posted on March 18, 2016 by Anthony Jerdine

Sony Acquires Major Music Catalog for $750 Million
By Anthony Jerdine| March 18, 2016

Sony (NYSE: SNE) has purchased the remaining half of a music catalog owned by the estate of Michael Jackson.

The deal to buy the 50% of Sony/ATV Music Publishing that Sony did not already own will give the company full rights to classic songs by The Beatles, Bob Dylan, The Rolling Stones, Marvin Gaye, and many other artists. However, it will not include rights to Jackson’s own work, which his estate will retain.

Sony will pay the Jackson estate $750 million for its stake in the catalog under the terms of a process that began in September 2015, when Sony exercised a right that has existed since the joint venture was formed by Michael Jackson and Sony in 1995, the company explained in a press release. That previous agreement allowed for one partner to purchase the other partner’s interest pursuant to a procedure outlined in the Sony/ATV operating agreement.

“The entertainment businesses have long been a core part of Sony and are a key driver of our future growth,” said Kazuo Hirai, president and CEO of Sony Corporation. “This agreement further demonstrates Sony’s commitment to the entertainment businesses and our firm belief that these businesses will continue to contribute to our success for years to come.”

What does this mean?
While Hirai’s statement makes the deal sound like a typical business transaction, it’s actually the culmination of a piece of Jackson’s legacy that rivals his music career. The singer purchased what would become Sony/ATV in what is now considered one of the best business deals in entertainment history.

“This transaction further allows us to continue our efforts of maximizing the value of Michael’s Estate for the benefit of his children,” said John Branca and John McClain, Co-Executors of the Estate.

It also further validates Michael’s foresight and genius in investing in music publishing. His ATV catalogue, purchased in 1985 for a net acquisition cost of $41.5 million, was the cornerstone of the joint venture and, as evidenced by the value of this transaction, is considered one of the smartest investments in music history.

The deal makes Sony undisputedly the largest music publisher in the world. In addition to the many classic artists’ copyrights the company either controls or administers, it also manages work from current stars, including Alicia Keys, Lady Gaga, Pink, Shakira, Ed Sheeran, Sam Smith, Taylor Swift, and Kanye West, among many others.

Publishing matters more than ever
With the transition to digital downloads and subscription services like Pandora and Spotify, publishing rights remain an important element in how songwriters get paid. As the publishing company, Sony either outright owns or administers songs on behalf of the songwriter.

When Pandora streams music, the publishing company collects a mechanical royalty (money owed for a song being reproduced either physically or digitally) and a performance royalty (money owed when a particular song is streamed, played on the radio, or performed in public). In some cases, Sony/ATV owns a song outright (and pockets whatever Pandora, Spotify, or any other company pays), but in most cases, it shares the revenue with the songwriter.

Given that physical music now only sells a fraction of what it once did, owning publishing rights is the key to making money in this industry. Locking up this catalog for $750 million may prove to be a bargain in the long-term given the number of timeless songs — everything from New York, New York to All You Need Is Love — that Sony now fully owns.

Sony Acquires Major Music Catalog for $750 Million