After years pouring funds into the shale boom, bond buyers are getting increasingly selective as defaults rise and many explorers continue to burn more cash than they make.
While Exxon Mobil Corp. and Occidental Petroleum Corp. have recently sold a combined $20 billion of investment-grade debt, junk rated issuers are getting a far different market reception.
High-yield energy companies have sold about half as much corporate debt this year as they had at the same time in 2018, according to data
compiled by Bloomberg.
Issuance in the broader junk bond market, by contrast, was up about 30%.
“We haven’t seen new energy deals getting done in the first seven months of the year for anything rated lower than B,” Eric Rosenthal, senior director for leveraged finance at Fitch Ratings, said in an interview.
The energy sector, which makes up the biggest chunk of the US high yield bond market, has been the laggard this year in the Bloomberg Barclays high-yield index as defaults ratcheted higher.
Wary investors are more than ever pushing shale explorers to shift from the growth-focused novelty they once were to better-managed, cash-generating businesses. While they’re sitting on a wealth of crude in regions like the Permian Basin of West Texas and New Mexico, constantly tapping those resources with high-tech rigs and fracking technology can be a money drain that some have handled poorly.
And while oil has more than doubled from the 2016 low, trading has been erratic. Earlier this month one oil benchmark suffered the steepest one-day drop since February 2015, as the escalating trade war between the U.S. and China roiled financial markets. Falling crude prices hurt revenue and make it difficult for companies to continue spending as much money on projects.
“Ultimately, investors are also becoming a little more disciplined, if you will, and part of it may be just because of volatility on the commodity side,” said Mark Freeman, Founder and Chief Investment Officer at Socorro Asset Management LP.