Investors Are Pricing Junk-Energy Bonds Like $80 Per-Barrel Oil Is Back

Wishing it was 2014 again.

A pump jack operates in an oil field near Corpus Christi, Texas.

Photographer: Eddie Seal/Bloomberg

It's back to the future in the market for junk-rated debt sold by oil companies.

Investors are treating high-yield bonds issued by energy firms like it's the good old days for black gold. Yields on the securities have have dropped to 6.73 percent, a level last seen at the end of 2014 when oil was trading around $80 a barrel. 

"The market seems to be pricing in perfection for a number of reasons," according to Bloomberg Intelligence Senior Credit Analyst Spencer Cutter. "Part of it has just been the reach for yield throughout the entire fixed-income market, so even bonds from distressed credits get bid up," he said. Add to that the fact that drilling costs are falling, and the sustained (if modest) recovery in oil prices is causing some to bet that the worst is over.  

"There was a view back in the first quarter when it felt like the world was going to end, and that given how much carnage there had been in the sector eventually things would bounce back, and being long energy bonds was at some point going to be the play of a career," Cutter said. Companies including Halcon Resources Corp. and Linn Energy LLC went bankrupt in the first half of 2016 and were removed from the index, he said, meaning their bonds are no longer dragging the index down.

Investors' embrace of riskier energy debt is likely to make life easier for oil and gas companies that had found themselves shut out of markets when oil prices plummeted — but they might want to hurry and get those deals done. 

"There are a lot of things that have to go right to justify the market being where it is today," Cutter said. "If those expectations or assumptions don't come to pass, then there could be another wave of restructuring in a year or two," he concluded. 

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