Oil exploration companies across Europe have not been major beneficiaries of the cure-all released by the European Central Bank last week. Yields on the bonds of several companies have shot up after noise about delayed payments hit the market as compressed oil prices hit companies in the sector hard. This morning, January 27, an renouncement from Afren confirming difficulty in meeting its obligations fuelled speculation that more companies could follow.
Afren has $253 million of 11.5% per annum retail bonds due in 2016. The company is supposed to pay a $15 million coupon on that issue this month, but hampered access to cash means it may not be able to do so.
According to an official statement, “New funds will be required to meet interest and principal repayments, working capital and a reduced capital expenditure programme. The company will be having discussions with its existing stakeholders and new third-party investors regarding recapitalizing the company.” The company’s share price crashed on Tuesday, while bond yields rose in response to heightened risk.
Euro oil sector suffers
There’s no telling if the Afren decision is based entirely on individual circumstances or if the situation for the industry as a whole is heading in that tumultuous of a direction. A retail bond from EnQuest, a London listed oil exploration firm, issued last February, could see the oil market’s volatility directly impact ordinary investors.
That company’s bond, which carries a 5.5% coupon and matures in 2022, lost about 50% of its value in the six months in which oil’s momentum turned earthward. The price of the company’s bonds spiked above $60 once again last week, but the effect of today’s news from a related company may be bad news for holders of those bonds.
Another British firm, Premier oil, has seen its debt securities follow a similar pattern, although the movements aren’t quite so dramatic. Swedish company PA Resources has seen similar price action and appears to be in talks to secure help financing its own coupon payments.
ECB can’t beat oil
No matter how much money the ECB pumps into the bond markets, oil companies will not be able to pay off their debt if prices aren’t greater than costs. No matter what money flows from the sovereign markets into corporates, risks are still high in many markets, and investors are unlikely to buy these kinds of bonds without dedication to the cause.
Unless the European Union buys oil futures the way it’s planning to buy bonds, these oil companies are going to have financing difficulties for an indeterminable period. Their shares, as well as their bond prices, are going to be extraordinarily rocky as a result. A look across the ocean gives an instructive, if not directly analogous, look at what’s ahead for European oil bonds.
Trouble in the US
The problems projected in the US high-yield bond market could very well be mirrored in Europe, though there’s no surety about the ultimate form the effect of the oil price crash will have on companies in America. Speculation that there could be a contagious wave of defaults through the high yield sector is mounting, but there’s absolutely no proof of such moves just yet.
The US market is a different beast, being more highly leveraged than its European counterpart and more reliant on alternative sources of oil. Most European exploration companies have been forced to stay away from large-scale hydraulic fracturing because of the weight of environmental regulations set by the EU government.
Risk averse investors, who probably won’t be investing in a company like Afren to start with, will be staying away from the market until the dust clears. High yield bonds are a game few are good at playing, and current volatility will see chaos in indices and individual bonds alike.