Energy stocks have been the worst performers among the S&P 500 index of the biggest U.S.-listed companies, but their bonds have gained. The divergence has baffled some investors, according to the Financial Times.
“Investors and bankers have advanced several theories for why the energy stocks and bonds have decoupled,” the newspaper reported. “Several point to a crude price at a level that while allowing oil and gas producers to service debts and avoid default, limits their ability to meaningfully bolster profits and pay out dividends to shareholders.”
U.S. oil is down about 6 percent since the beginning of the year, as measured by futures trading in West Texas Intermediate crude. The biggest oil-producing countries have placed caps on their output in an effort to stabilize prices after prices collapsed to 13-year lows last year. WTI crude traded at about $50.85 a barrel on Thursday morning in the U.S.
“Producers slashed capital spending during the downturn, idling equipment and work crews,” the FT reported. “They also became more efficient, having learnt to coax more oil from each well. Costs of production declined in turn, meaning $45 a barrel is now the U.S. oil price an average producer needs to turn a profit, according to Bernstein Research.”
Drillers with lots debt have trouble surviving when oil is around $30 a barrel, one analyst said. At $40 or more, heavily indebted oil producers can service their obligations. That doesn’t mean that dividends are safe, though, which affects the price of equities.
The difference in returns between equities and credit doesn’t mean that junk bonds aren’t risky.
“High-yield investors have given these producers the benefit of the doubt that Opec or some other natural or unnatural force will keep a floor on the price of oil,” Leslie Biddle, a partner with Serengeti Asset Management, told the FT. “The idea that they are fine at $50 a barrel is not accurate. They might have liquidity for another year and a half, but they are not replacing reserves. They are melting ice cubes at $50 a barrel.”
The Organization of the Petroleum-Exporting Countries met in Vienna this week to discuss extensions to the production cap. One delegate to the cartel said they decided prolong the current quota by another nine months to March 2018.
That disappointed investors, as oil sold off by about 1.7 percent.
"It is a disappointment that OPEC hasn't done more to balance the markets," Olivier Jakob, energy markets analyst at Swiss consultancy Petromatrix, told CNBC. "A nine-month extension of the output cuts is already baked into prices. This shows there's not much more OPEC can do."
U.S. oil production has risen 10 percent in the past year to meet demand, undermining OPEC's efforts. Meanwhile, Nigeria and Libya are exempt from the OPEC cap as the countries try to recover from internal military strife.
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