Grid IconAll Posts Blog

The Teflon Energy Sector

Posted on July 20, 2020

By: Caesar Silvestro

Over the past two weeks, there has been a great deal of news that would seem to negatively impact the prospects for traditional oil and gas companies that largely comprise the High Yield Energy sector. However, High Yield Energy credit spreads were little changed. Is the +300 basis point of credit premium in comparison to the aggregate market really compensating investors for the risk?

Biden’s Green Plan

Former Vice President Joe Biden unveiled a promise to spend $2 trillion over four years to reduce emissions. In his plan, he would expand subsidies for solar and wind power and give the auto industry subsidies to develop electric vehicles. In addition, Biden promised to curtail oil and gas development on-federal lands and water.

Environmental Litigation

A US District Court ruled that Energy Transfer LP’s Dakota Access pipeline will have to shut by August 5th. If the ruling survives appeals, it would be the first time a major pipeline in service was ordered shut because of environmental concerns.

The US Supreme Court refused to let construction start on TC Energy Corp.’s Keystone XL oil-sands pipeline, rejecting a bid by The Trump administration to jump start the $8 billion project.

Dominion Energy and Duke Energy announced the cancellation of the Atlantic Coast Pipeline due to ongoing delays and increasing cost uncertainty which threaten the economic viability of the project.

OPEC Turns Up the Spickets

OPEC + announced its plan to gradually open the taps in August, adding at least 1 million barrels a day of supply to the market. OPEC + members believe the supply increase is warranted given an anticipated rebound in demand as the world recovers from the COVID crisis. However, the move also indicates that the consortium is willing to add supply when oil is only trading at $40 barrel, spelling trouble for US oil producers that have a high cost of production.

Multiple Defaults

Chaparral Energy, Noble Drilling, and Denbury Resources defaulted on debt payments last week.

It appears traditional oil and gas companies could be facing a further reduction in demand from renewables and EVs. Environmental litigation could curtail new pipelines and increase the cost of existing pipelines, adding additional pain to MLP operators that are already working in a challenged environment. Margin pressure will likely continue for US E&P companies from OPEC producers that appear to be more than willing to supply oil at $40 a barrel.

So far, the High Yield Energy sector seems to have shrugged off the news. Are these negative factors already baked into the +300 basis points of credit spread premium over the aggregate market? Is the Federal Reserve’s support of the credit markets causing investors to turn one eye blind to risks as they reach for yield in a low interest rate environment?  Time will tell.

Caesar Silvestro has nearly 20 years of buy-side and sell-side research experience in the High Yield and Distressed markets. He was an Executive Director at BBVA Securities focused on the Energy Sector and an Executive Director at MF Global overseeing the Distressed/High Yield research effort. He holds a MBA in Finance from NYU Stern School of Business and is a graduate of Franklin and Marshall College.

Disclaimer: The information on this blog site is for informational purposes only.  Advantage Data makes no representations as to the accuracy, completeness, suitability, or validity, of any information. Advantage Data will not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided AS-IS with no warranties and confers no rights. Information is not and should not be considered professional financial investment advice. In all events, Advantage Data is not a broker-dealer, shall not operate as a broker or a dealer, is not holding itself out as a broker or dealer and is not engaged in the business of buying or selling securities or otherwise required to register with the National Association of Securities Dealers.


Are you using AdvantageData?

AdvantageData is your fixed income solution for pricing, analytics, reports, and insight on approximately:

  • 500,000+ U.S. and international corporate bonds
  • Over 300,000+ BDC fair value assessments dating back to 2000
  • Over 22,000+ syndicated loans
  • Over 100 equity markets worldwide
  • One platform 15 products and services from debt to loans to mid-market
  • Used by top buy and sell-side firms worldwide


facebook share icon twitter share icon linkedin share icon
Ready to get Started? Free Trial