A Review of the Nigerian Energy Industry

Oil, bonds go their separate ways

27 September 2015, News Wires – The rebound in oil prices has not been enough to stop the bleeding at many US energy companies, whose bonds keep weakening – and whose ability to muster fresh capital is dwindling away.

Bonds investments
Bonds investments

Oil and bond prices are moving in opposite directions, underlining the market’s lack of confidence in a cash-strapped sector that is seeing its prospects go from bad to worse.

The difficulties will start intensifying next week, when banks begin their twice-yearly review to set ceilings on how much exploration and production (E&P) companies can borrow. And with crude at US$45 per barrel – far below the US$60 minimum that underpins many E&P business models – the expected cut in borrowing bases will come as a double whammy.

Revenue is down, capital market access is limited and cash is in short supply – a sticky situation for even the healthiest of firms, and one that could well prove fatal for some. “Oil prices in the mid-40s just don’t work for many of these companies,” said James Spicer, senior analyst for high-yield energy research at Wells Fargo Securities.

“The optimism over a 2015 price recovery has faded.” The end of that optimism has spurred the decoupling of oil and bond prices, which normally are more closely correlated.

Rather than bouncing back in tandem with crude prices, which touched lows under US$38 in August, junk-rated E&P bonds have softened instead.

The Bank of America Merrill Lynch high-yield energy index – comprising 167 issuers with notional debt of US$210bn – is back near record wides at Treasuries plus 1046bp. It has widened 75bp in September, while oil prices have remained flat since their recovery at the end of August.

“In the first eight months of the year, the correlation was 80%,” Brian Gibbons, an analyst at CreditSights, told IFR.

“But in the last three weeks that has declined considerably to 29%. There has been a break in the link.”

  • IFR
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