Energy Producer May Enter Rate Swap
Ocean Energy, an oil and gas producer with USD1.2 billion in annual revenue, is considering entering an interest rate swap on the back of a five-year USD400 million debt offering it sold earlier this month. The company may look to convert the fixed-rate deal into a synthetic floating-rate obligation, according to Winston Talbert, v.p. and treasurer in Houston. "One of the reasons we did a five-year was so that we could swap it back to floating," he said, adding, "we're sort of mulling it over."
In any swap, Ocean Energy would look to pay a spread over six-month LIBOR and receive the 438% coupon on the bond. However, Talbert noted that given the low coupon for a BBB rated energy company, he may also choose to leave the liability in fixed rate. In addition, the cash was raised to refinance outstanding debt with an 878% coupon. "We're picking up quite a bit as is and the last thing we want to do is swap it out at the low and have rates go up," he noted. But, Talbert estimated the company could save even more by entering a swap and paying roughly 120 basis points over LIBOR.
The bond offering brings Ocean Energy's fixed-rate debt to 70% of its total outstanding, and although the company strives to have an even mix of fixed and floating-rate debt, Talbert said he is comfortable with the current level. He added Ocean Energy would select derivatives counterparties from among its 15-member bank group and not limit the business to Goldman Sachs and Merrill Lynch, who underwrote the deal, if it executes the swap. The company has about USD1.4 billion in outstanding debt.