Investors are burdening themselves with the debt of U.S. oil and gas companies, lured by their ability to generate cash again as energy prices soar.
The funds now hold overweight positions in high-yield energy bonds relative to a benchmark, according to Bank of America Global Research. This means that instead of simply trying to track the proportion of energy sector bonds in the index, investors are choosing to own many more of them.
Investor appetite for energy bonds comes as crude oil prices rebound fiercely, having more than doubled since late 2020 to $90 a barrel, their highest level in seven years. Natural gas prices have also increased.
Range Resources, a shale gas producer active in the Appalachian region, raised $500 million in January, receiving twice as much investor demand as typical oil and gas deals, according to a person with direct knowledge of the situation. transaction.
The strong appetite for debt helped Range cut its interest charges by almost half, with the coupon on the eight-year deal falling to 4.75%, significantly below the 9.25% coupon on the debt that the product was used to refund.
Investors have noted that since the pandemic, many financially weaker energy companies have either restructured their debt or gone bankrupt, such as Chesapeake Energy, a pioneer of the shale revolution. Energy debt accounted for more than a third of the $141 billion in high-yield defaults in 2020, according to JPMorgan, leaving stronger names behind.
The fall in oil prices at the start of 2020 also led to downgrades of several higher quality companies, such as Occidental Petroleum, improving the overall quality of companies currently in the high yield bond market.
Rating agencies recently upgraded several shale oil and gas companies, reflecting stronger balance sheets for a sector once known for outsized spending.
Along with capital discipline commitments, operators such as Range, Chesapeake, Pioneer Natural Resources and Devon Energy have highlighted their efforts to reduce greenhouse gas emissions from operations and even from the combustion of fuels that they produce.
These pledges, made as more investors consider environmental, social and governance (ESG) factors in their decisions, have also contributed to the appetite for energy debt, investors said.
“We look at ESG factors when we look at energy names,” said Nichole Hammond, high yield portfolio manager at Angel Oak Capital Advisors. “We focus on the best operators who want to improve. It ultimately comes down to credit, but there are more and more layers of ESG metrics.
Others said the improving financial outlook for energy companies had simply pushed ESG priorities into the background.
“I think people hid behind ESG when oil prices were just lower,” said one debt banker. “ESG has taken a back seat. I’m not saying ESG is no longer relevant, but it doesn’t seem to be as important.”
Investor appetite has pushed the yield spread between high yield energy bonds and the high yield bond index down to just 0.2 percentage points, down from around 2 percentage points at the start of 2021 and into 12 percentage points at the worst of the pandemic in 2020.
However, investors said the bond rally had more room to manoeuvre, particularly among debt from companies such as Occidental, which are expected to be upgraded to investment grade soon by rating agencies.