Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Executives of risky U.S. oil companies should feel proud.

They sold billions of dollars of junk-rated debt earlier this year, locking in historically low borrowing costs and pushing out their maturities. And they did so at the expense of debt investors, who now find themselves getting burned yet again, less than two years after one of the biggest selloffs ever in oil-related risky debt.

Big Fall
Oil prices have been falling as investors assess the growing amount of crude production
Source: Bloomberg

Consider EP Energy Corp., for example. The oil and gas producer sold $1 billion of bonds in February at 100 cents on the dollar, just as oil prices peaked for the year. Since then, crude has plunged and EP Energy's new bonds plummeted to 70 cents on the dollar.

Off a Cliff
EP Energy's $1 billion of debt has lost $300 million in value since being issued earlier this year
Source: Bloomberg

In other words, investors have lost $300 million of market value in less than five months on just this one bond issuance alone. While this is an extreme example, it's not an isolated one. A good chunk of the $20.2 billion of new energy junk bonds sold this year have lost value since being sold.

Or consider Halcon Resources Corp., which sold $850 million of bonds on Feb. 9. Prices on the debt have fallen to 87.5 cents. And Chesapeake Energy Corp.'s $750 million of notes issued less than a month ago at par have dropped to 95 cents on the dollar. 

Trading Down
Halcon Resources sold $850 million of debt earlier this year that has since performed poorly
Source: Bloomberg

On the flip side, these energy companies have truly shored themselves up. Many can go years without having to borrow money again. They can keep drilling. And they're paying interest rates that are much lower than what they would receive today.

Widening Gap
Investors are demanding the biggest premium to own energy junk bonds since September
Source: The Bloomberg USD High Yield Corporate Bond Index

But this episode raises some uncomfortable challenges for investors, who just months ago were demanding almost no extra yield to own oil-related junk bonds over broader market rates. 

Perhaps leveraged energy companies are inherently riskier than other types of borrowers because of the unpredictability of oil prices. And maybe it's good to avoid oil drillers when many of them are raising cash because they'll just funnel that into producing more crude, flooding the market with supply and thus lowering prices.

Many analysts have faith that Saudi Arabia and other oil-producing nations will do everything possible to bolster crude prices. Members of the Organization of the Petroleum Exporting Countries have already agreed to limit output for the foreseeable future. But these nations have steadily lost control over energy prices. This is in large part due to U.S. companies, which ramp up production each time they receive another installation of fresh cash.

While the selloff in energy junk bonds is nowhere near the carnage of 2015, it still serves as a warning sign at a time of profound complacency. Even after a rash of defaults and bankruptcies, the oil industry is still vulnerable to notoriously fickle crude values. It makes sense for investors to demand extra yield to compensate for this volatility.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net