The cost for U.S. high-yield energy companies to borrow in the bond market soared to the highest level in more than four years as Goldman Sachs Group Inc. said oil may drop below $20 a barrel.
The yield premium investors demand to hold the junk-rated debt sold by energy companies over ultra-safe Treasuries widened to the most since 2012, part of a global rout that has seen stocks tumble toward a bear market and volatility rise amid fears of a worldwide economic slowdown. Crude could drop “into the teens,” from about $30 on Tuesday, before supply and demand are brought back into balance, according to Goldman Sachs.
In the U.S., the risk premium on the Markit CDX North America High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped as much as 17 basis points to 589 basis points, the highest since at least August 2012. The energy sector added the most risk, jumping as much as 38 basis points to 1525 basis points.
Oil Bankruptcies Coming Up
About 150 oil and gas companies tracked by energy consultant IHS Inc. may go bust as a supply glut pressures prices and punishes revenues.
The number of companies at risk is more than twice the 60 producers that have already filed for bankruptcy, Bob Fryklund, chief upstream analyst at IHS, said in an interview. A further shake out would help stimulate deals that have been on hold because buyers and sellers have disagreed on asset values, he said.
“Nobody is buying because there is a mismatch between expectations,” Fryklund said in an interview in Tokyo. “We need to close that gap. And the way that that will happen is the rest of those bankruptcies will go forward.”
How Low Can It Go?
Goldman, usually a contrarian indicator is now pondering oil below $20. Meanwhile, producers want their assets priced as if oil is $45. And here we sit near $30.
No one knows how low oil will go, but it certainly will not go to zero.
Energy company buyers at these prices will likely be rewarded eventually, as long as the companies do not go bankrupt.
With the slowing global economy and China’s feeble rebalancing effort, the wait could be longer than most think. If so, the number of bankruptcies will be on the high side of 160.
Mike “Mish” Shedlock