Will Energy Bonds Hold Up in a Volatile Oil Market?
A dramatic fall in oil prices, followed by a sell-off in high-yield energy bonds—is it time to worry about oil and gas companies again? Quite the contrary. The North American issuers that make up most of the world’s high-yield energy market are in a better position today than they have been in years.
Investors with sweaty palms may be forgiven, however. The price of West Texas Intermediate (WTI) oil fell 16% over the past month, to $62 a barrel. The last energy crisis began in October 2014 with a 14% decline in oil prices in one month.
That crisis lasted two years. More than 100 energy companies went bankrupt, according to Haynes and Boone. And the share of borrowers that had missed a payment in the previous 12 months ballooned from 0.5% to 22% two years later in 2016 (Display 1).
But there are two reasons why investors should take a deep breath. First, the forces driving oil prices south this time are different than in 2014, and arguably less foreboding. More importantly, the fundamental quality of high-yield issuers has improved significantly, making the recent drop in oil prices less troubling.