Bondholders suffer $150bn oil price hit
Rising default fears have cut $2.3tn from energy companies’ market value in same two-year period
Investors have suffered losses of at least $150bn in the value of oil and gas company bonds, as the slump in crude prices since the summer of 2014 has fuelled fears of a wave of defaults in the US and emerging markets.
The 300 largest global oil and gas companies have also seen $2.3tn sliced from their stock market value over the same period, a 39 per cent slide since oil began its decline, an analysis by the Financial Times has found.
The losses show how intense the financial strain on oil producers from falling crude prices remains, in spite of the partial recovery in prices since January. Oil is still down about 65 per cent from its June 2014 peak.
Banks have also been increasing their provisions for energy-related losses on their lending. With several banks having loans to the industry equivalent to more than 40 per cent of their equity, lenders have tightened loan agreements with oil producers, and capital markets remain closed to the lowest rated groups.
More than $150bn has been shaved off the value of 1,278 actively traded bonds denominated in dollars, euros, sterling and yen since Brent crude hit almost $116 a barrel in June 2014.
Borrowing by oil and gas companies has soared over the past decade. Their total debt, including loans, almost tripled from $1.1tn in 2006 to $3tn in 2014, according to the Bank for International Settlements.
The borrowers with the steepest increase in debts relative to their assets included US independent production companies caught up in the country’s shale boom, and national oil companies from emerging economies including Pemex of Mexico, Petrobras of Brazil and CNPC of China.
Cheaper oil can act as a stimulus to global growth, by redistributing real incomes from producing countries to consumers, who are often seen as more likely to spend the gains they make.
However, Hyun Song Shin, chief economist of the BIS, said weak oil prices had also added to volatility in equity and bond markets.
“Low oil prices fuel a reduction in risk-taking, and when there is less risk-taking, asset prices will fall. It can lead to a downward asset price spiral,” he said.
The drop in crude has confounded portfolio managers who had bet on a stabilisation last March, when prices briefly rallied. The subsequent decline was a blow to many investors who bought bonds just before prices took a second and deeper dive lower.
That downturn has weighed heavily on funds investing in subinvestment grade corporate debt, with portfolios managed by Franklin Templeton, Western Asset Management, Nuveen, American Funds, John Hancock, Loomis Sayles and USAA suffering losses over the past 12 months.
The effect has been even more pronounced on funds that focused explicitly on the energy sector: two Advisory Research funds investing in pipelines and energy infrastructure have declined by more than 35 per cent over the past year.
Twenty of Europe’s biggest banks have energy loans totalling almost $200bn between them — enough to wipe out a quarter of their common equity. In the US, twenty of the leading banks have loans totalling $115bn, or 11 per cent of their common equity.
The French banks stand out for having some of the highest oil and gas exposures relative to their equity.
BNP Paribas, whose $12.8bn of loans to oil and gas companies is the highest of the French banks, had “significantly reduced” its activities in the sector, CFO Lars Machenil said.
Natixis, which has the highest exposure relative to its equity of any European bank, has also been pulling back, granting 15 per cent fewer loans in the fourth quarter of 2015 than a year earlier. The bank said it was “confident” about its exposure because most of its borrowers were not exposed to oil price risk.
The recent rally in oil prices has provided a fillip to investment managers. Several of those most exposed to energy bonds have outperformed their peers. But the lack of an agreement between Opec members and the prospect of new supply from Iran has fuelled uncertainty about oil’s longer-term prospects.
“The problem with the market is that it’s very naive to say I’m going to wait until the bottom and then I will buy,” Matthew Freund, a portfolio manager with USAA, said. “Four weeks ago … it was very hard to find a bid. Fast forward to today and everything is very well bid and it is very difficult to find attractive offerings.”
This story is the first in a new FT series, entitled Oil Lower for longer, that looks at the far reaching consequences of the prolonged slump in crude prices.
The FT’s analysis covered roughly 82 per cent of the $1.18tn of outstanding energy bonds through June 30, 2014, for which prices could be obtained. It did not include the value of distressed bond exchanges or reflect coupon payments made on the debt.
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Petrobras posts record loss amid oil rout
Scandal-hit Brazilian producer loses $10.2bn in fourth quarter
Petrobras, the state oil company at the centre of Brazil’s largest corruption scandal, recorded its biggest loss on record in the fourth quarter as oil prices slid.
The Rio de Janeiro-based producer said on Monday it had made a R$36.9bn ($10.2bn) consolidated net loss in the fourth quarter, compared with a R$26.6bn loss in the same period a year earlier.
A collapse in global oil prices has hit Petrobras just as it struggles to emerge from a corruption scandal that has paralysed the industry and triggered the country’s worstpolitical crisis in decades.
Over the full year, Petrobras recorded a net loss of R$34.8bn — 61 per cent lower than the R$21.6bn loss booked in 2014.
The loss was driven by writedowns to assets and investments totalling R$49.7bn over the year — equivalent to one-third of the company’s market value. About 80 per cent of the impairments were in the company’s exploration and production division, the company said.
Total revenues slipped to R$321.6bn in 2015 from R$337.3bn in the previous year and remained little-changed in the fourth quarter at R$85bn.
Brent crude, the international benchmark, hit a 13-year low near $27 a barrel in January as the global oil glut wreaked havoc across the industry and raised fears that deflation could hit already lacklustre global growth.
The oil group’s finances have also come under strain from the bribery and kickback scandal, which prompted a R$6.2bn write-off last year and has made it more difficult to access new funding.
In February, Petrobras turned to China Development Bank for a $10bn loan as part of a deal to supply oil to the country. It has also raced to slash investment and sell assets.
In January, the company cut its five-year investment plan by $32bn to help preserve cash. The state-controlled oil producer said it planned to invest $98.4bn between 2015 and 2019, down 25 per cent from its original forecast of $130.3bn.
Brazil’s Estado de São Paulo newspaper reported this week that the company also planned to axe 12,000 staff — about 15 per cent of its workforce — via a voluntary redundancy programme.
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