Decoupling of equity and debt prices captivates investors ahead of Opec meeting
This has been a year of agony and bliss for investors in US energy companies.
The sector has ranked among the worst performing within the benchmark S&P 500, with an 11 per cent decline wiping more than $165bn in market value off nearly three dozen of the stock index’s oil companies. Energy sector corporate bonds, by contrast, have risen more than 3 per cent. It is a divergence that has both captivated and puzzled investors ahead of a Thursday meeting of Opec, where oil ministers will debate output. Investors and bankers have advanced several theories for why the energy stocks and bonds have decoupled. Several point to a crude price at a level that while allowing oil and gas producers to service debts and avoid default, limits their ability to meaningfully bolster profits and pay out dividends to shareholders. Crude prices have stabilised near $50 a barrel after reaching a 13-year low last year, underpinned by strengthening fuel demand and an Opec pact to curtail supplies reached late last year. Producers slashed capital spending during the downturn, idling equipment and work crews. They also became more efficient, having learnt to coax more oil from each well. Costs of production declined in turn, meaning $45 a barrel is now the US oil price an average producer needs to turn a profit, according to Bernstein Research. “At $30 a barrel, high-yield energy companies cannot survive,” says Vinay Pande, head of short-term investment opportunities at UBS Wealth Management. “When you head up to $40 or more . . . the default and recovery question goes away.”
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