Junk bonds that tie shale borrowers to Kurdistan

Just like in the summer of 2014, fighting in northern Iraq is sending ripples through the oil market.
A lot has changed in the meantime. Back then, IS was sweeping all before it; now, the wannabe caliphate’s collapse is allowing old tensions between Baghdad and the region’s Kurds to resurface. A lot has changed in the oil market, too. Brent crude jumped back above $110 a barrel during the brief panic in June 2014. On Monday morning, it climbed to roughly half that level.
For one corner of the oil sector, though, things look quite similar to that pre-crash summer:
The high-yield bond market did shut down for oil and gas producers in early 2016, when Brent dipped below $30 a barrel. Issuance has come roaring back since then, though, especially over the past year, as OPEC’s agreement to cut supply has helped to stabilize (if not boost) oil prices.
And barely halfway through October, issuance this month looks set to be the highest by far since the the crash, according to Spencer Cutter, a senior credit analyst with Bloomberg Intelligence:
If it looks like the bond market has somehow forgotten the past couple of years entirely, there are some subtle differences beneath the headline numbers worth
noting.
Part of that retracement in average yields from double digits in early 2016 to the current level can be chalked up to survivorship bias, as chapter 11 has claimed some of the most distressed issuers. The face value of the BofA Merrill Lynch US High Yield Energy Index has shrunk by more than a fifth since March 2016 — again, back to levels last seen in summer 2014.
Moreover, while the average absolute yield is back to where it was just over three years ago, energy issuers aren’t getting quite the same benefit of the doubt relative to other sectors as they once did. Option-adjusted spreads for high-yield energy bonds, at about 480 basis points, are similar to summer 2014 levels. But these days, that is relatively higher than for the high-yield market as a whole:
One interpretation of that chart is that the high-yield market is kinda crazy, but it’s a bit less crazy when it comes to energy issuers.
In any case, the bigger point is that the window is open, and E&P firms, pipeline operators and oilfield services contractors are taking advantage of that. More than 90 percent of issuance in the third quarter has been to refinance existing debt, according to CreditSights — pushing out maturities and providing a better position from which to renegotiate revolving credit lines. About $23 billion worth of credit commitments to E&P companies are due to expire in 2019, according to Bloomberg Intelligence.
Just like last December — when issuance jumped in the wake of the OPEC agreement — a powerful prop for that window is $50-plus oil. As I’ve noted here, that’s a level above which E&P firms have shown a willingness to hedge future production to underpin their growth plans (and hedging
appears to have also jumped
recently).
It is also, it seems, a level at which borrowers can refinance at reasonable cost — despite oil prices being half of what they were a few short years ago. Geopolitics retains its capacity to nudge those prices higher, but E&P firms are now well-practiced in taking advantage of that to further their own supply.

—Bloomberg