U.S. OIL DEBT

Renewed pressure on crude oil prices on Monday weighed heavily on the shares and bonds sold by US energy companies.

Debt sold by energy companies is among the worst performing assets within the $1.3tn US high-yield market this year. The group, which accounts for close to 15 per cent of the junk bond market, has experienced pronounced selling as falling oil prices have raised doubts about the ability of smaller oil and shale gas companies to service their debt obligations.

Further declines in oil prices are seen hitting equity and bond prices and forcing the delay or cancellation of pending or new debt sales by energy companies.

"The high-yield market has been hijacked by the gyrations in the oil markets," said Adrian Miller, director of fixed-income strategy at GMP Securities. "The drop in oil prices hits energy bonds and stocks and is dampening sentiment on broad markets."

Equity groups representing small and medium-sized oil and gas equipment and services companies hit new lows for the year on Monday as WTI, the US crude oil benchmark, briefly dropped below $63 a barrel, its lowest since June 2009. Crude was trading above $100 during the summer.

The S&P 400 index of oil and gas equipment and services fell 4.1 per cent, while the S&P 600 sector fell 6.2 per cent at the close of Wall Street's trading on Monday.

Also under pressure were the larger, so-called oil majors including Exxon, Chevron and ConocoPhillips.

Investors are worried that while the more than 40 per cent decline in oil prices since June has been pinned on a glut of supply, there are signs that it may also reflect an ebbing in demand. Chinese trade data disappointed markets at the start of the week and also weighed on oil prices.

Shares in Exxon were trading 2.2 per cent lower by the close, while Chevron fell 3.6 per cent and ConocoPhillips declined 4.1 per cent.

"The large US oil companies are diversified and can withstand for some time a shock in oil prices," said Mr Miller. "But that doesn't mean they too will not cut back in investments and dividends."

For the US high-yield bond market, the gloomy sentiment has weighed on the appetite for debt issuance from energy companies and resulted in borrowers delaying new deals. Last week, banks working on a loan for C&J Energy Services, a hydraulic fracturing company, postponed the deal, citing "market conditions", according to S&P LCD.

Analysts at Citi said in research that while some high-yield energy bonds have been trading more than 50 points lower over the past several months, "in at least some cases fundamentals haven't deteriorated to the same extent, in our view".

The bank added: "Our equity analysts believe that more mergers and acquisitions will occur in the period ahead as stronger companies look to buy weaker ones on the cheap, which could be a good thing for credit investors since so many issues trade well below par."

ft.com