As investors wait for news from the OPEC meeting on Thursday, there is a question on the minds of many. The energy sector has been one of the worst performing in the S&P 500, with more than US$165 billion lost in market value across the index’s oil companies this year, while corporate bonds for the sector have gone up 3%.
Some speculate, as the Financial Times writes, that the crude prices have stabilized at a level that allows companies to service debts, but not meaningfully bolster profits or pay out dividends.
“At $30 a barrel, high-yield energy companies cannot survive,” Vinay Pande of UBS Wealth Management was quoted by FT as saying. “When you head up to $40 or more . . . the default and recovery question goes away.” He added that the low oil price “would not call into question the solvency of the oil majors, but you would question their ability to maintain a dividend”.
Still others point out that many riskier groups have already defaulted and been removed from major indices, or have repaired corporate balance sheets. But there is always the risk that a further drop in oil prices will hit bonds.
“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 of Serengeti Asset Management explained. “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.”