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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Bond Markets Losing Faith Even In Large Oil Companies

Energy bonds have become so beaten down that the yields on bonds from some investment grade energy companies are spiking above the yields on junk-rated U.S. debt, a very rare event that highlights the growing unease with which investors are viewing even the relatively strong oil producers.

In fact, the spiking bond yields on investment-grade energy debt show that even solid oil drillers “with the best of intentions can still just run out of room to move and run out of time. Things could get very bad,” Matthew Duch, a money manager at Calvert Investments Inc., told Bloomberg in an interview.

The magnitude of the crisis facing the oil and gas sector is illustrated by the fact that broader U.S. corporates with credit ratings in junk territory are seen as less risky than investment-grade oil and gas companies. Related: Oil Up On Positive Comments From Saudis

Such a situation isn’t sustainable – the ratings agencies are now catching up to a rapidly deteriorating business climate for these oil drillers. In February, Devon Energy, Anadarko Petroleum, Hess Corp., and Murphy Oil – all sizable oil companies once thought to be safe – lost their investment-grade ratings from Moody’s.

The bond markets, in other words, are no longer confident that even large oil and gas companies are creditworthy. Related: The Oil Market Is Beginning To Crack

Of course, rising bond yields is just another way of saying that the borrowing costs for energy companies have surged. As a result, after a record year in 2015 for bond issuance in the energy sector, the debt markets have now all but closed off. Bloomberg says that no new energy debt was issued in February.

The net debt levels across the U.S. energy sector ballooned in 2015, quadrupling from the year before. Net debt is now eight times EBITDA.

From mid-2014 through December 2015, an estimated 35 U.S. E&P companies have declared bankruptcy on more than $18 billion in debt.

By Charles Kennedy of Oilprice.com

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