Carnage in Junk-Rated Energy Bonds Returns With Plunging Oil

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Bond investors that lent to the riskiest energy companies have seen $4 billion of market value evaporate this week as oil trades at a four-month low.

SandRidge Energy Inc.’s $1.25 billion of 8.75 percent securities maturing in 2020 issued in May have fallen to 71.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Prices on $1.3 billion of notes sold in 2010 by Chesapeake Energy Corp., an energy producer that halted its stock dividend last month, have fallen to 82 cents on the dollar to yield 11.4 percent.

Up until June, the riskiest energy companies had tapped investors for a record $26.9 billion of debt this year. WPX Energy Inc.’s $1 billion issue in July was one of only four debt sales since then. Plunging commodities prices enabled investors to extract concessions from the energy explorer, which sweetened the terms on its bonds and reduced the size of its offering, according to four people with knowledge of the matter.

“Oil is dictating how the rest of the market is shaking out,” said Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott LLC in Philadelphia. “Every move each way shows how sensitive the bonds are to the price, because every little bit counts.”

West Texas Intermediate crude dropped to $44.38 a barrel at 9:45 a.m. in New York, pushing prices down more than 25 percent since it reached a five-month high in May. Natural gas traded at $2.814 per million British thermal units, down from a 2015 closing high of $3.194.

Global Rout

Concern is mounting that companies that issued secured debt to repay borrowing-base credit line obligations may continue to burn cash if oil and gas prices fail to recover. Excess supply and sluggish demand will prolong a global rout that’s pulled the price of crude into a bear market, according to estimates by Goldman Sachs Group Inc., which maintained a near-term target for crude of $45 a barrel.

The extra yield investors demand to hold junk-rated energy company debt rather than government securities surged to 10 percentage points, or distressed levels, on Friday in New York.

Still, the selling hasn’t been completely broad-based, according to Bloomberg Intelligence analyst Spencer Cutter, who pointed to bonds of Whiting Petroleum Corp. and Range Resources Corp. that are still trading close to par.

“At this point, investors are being selective, at least from a credit standpoint -- some companies are getting crushed, but other are not,” Cutter said. “If oil hits $35 and gas drops back down to $2.50, then investors may have to reevaluate the entire sector.”

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