Shares of EP Energy (NYSE: EPE) plunged on Tuesday, and were down nearly 20% at 2:45 p.m. EST. Driving the downdraft was the company's offer to exchange up to $1.2 billion in new debt for some of its existing debt to push out the maturity date.
EP Energy launched an exchange offer to swap up to $1.2 billion of new 9.375% senior secured notes due in 2024 for some of its legacy notes. The company's top choice would be to exchange these bonds for the roughly $1.2 billion of 9.375% senior notes coming due in 2020, which would push back its nearest-term debt maturity by four years. It's willing to pay 100% of the face value of those notes with the new ones. The company said that if the holders of those bonds don't agree to the exchange, it will accept a portion of its 7.75% notes due in 2022 and the 6.375% notes that mature in 2023. However, it's only willing to pay between $0.725 and $0.70 on the dollar for the other two series of bonds.
Exchange offers like this were much more common during the dark days of the oil market downturn. However, oil companies haven't had to go this route in recent months because credit has been much more readily available, which enabled them to refinance maturing debt with new bonds, often issued at much lower interest rates. That's likely why this news is driving down EP Energy's stock: It suggests the company can't borrow money in the public debt markets to refinance these notes.
EP Energy's focus remains on shoring up its financial position. However, despite steadily repurchasing debt with excess cash, the company still had $4 billion outstanding as of the end of the third quarter, which is massive considering it has a market cap of less than $500 million. Given that it still has a huge mountain to climb, I think investors should steer clear of this stock; these days, there are several stronger oil companies to choose from.
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