Speaking at an adviser roadshow in Sydney yesterday, Payden & Rygel senior vice president Brad Boyd said exploration and production (E&P) companies are under a “lot of pressure – and prices have reflected it”.
The break-even oil price for the ‘best’ E&P companies in the high-yield space is currently US$45 a barrel, Mr Boyd said. At the time of writing the West Texas Intermediate price was US$30.66.
“That’s the best ones. Everyone else needs to be higher – 60s, 70s, 80s,” Mr Boyd said.
“So in our opinion, a lot of these companies are going to be gone. I mean they’re just not going to exist.
“Others are going to be eaten up by the larger players in investment grade. And by the way investment grade [credit] is also going to be hurt, it’s just going to [have more survivors],” he added.
The demise of companies in the high-yield E&P space will have a “knock-on effect” along the energy food chain, he said, but it is unlikely to trigger a repeat of the global financial crisis.
“We think this one is going to be more along the lines of the telecom blow up in the early 2000s, maybe even along the lines of the dotcom bust [of the late 1990s].
“There will be a single industry that’s problematic, and it will be very painful. But it won’t be systemic,” Mr Boyd said.
As for the global banking sector, he admitted they have exposure and counterparty risk to E&P high-yield debt.
“They have exposure in terms of loans. There’s also been a stories about sovereign wealth firms that may own exposure to some of the European banks,” he said.
“But in all these cases, for all of these European banks, this is the best capitalised they’ve been in decades.
“So the answer is yes it’s going to be systemic, but there’s far more buffer than there’s been in the past with the banks,” Mr Boyd said.
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