Morning Commentary: Energy bonds better as OPEC, Russia agree to oil production cuts

By Paul A. Harris

Portland, Ore., Dec. 7 – Bonds in the thoroughly mauled high-yield energy sector caught a break on Friday as the Organization of Petroleum Exporting Countries and the Russian Federation agreed to meaningful production cuts, a fixed income investor said.

OPEC and Russia agreed in principle to cut production by a collective 1.2 million barrels per day, with OPEC cutting 800,000 and Russia cutting the remainder.

Energy indexes rocketed on the back of that news.

The barrel price of West Texas Intermediate crude for January 2019 delivery shot 3.69%, or $1.90, higher to $53.39.

The bellwether California Resources Corp. 8% senior secured second-lien notes due December 2022, a big liquid issue employed by high-yield bond investors for the purpose of tracking crude oil prices in the index, were up at least a point at 75½ bid, the investor said.

Those bonds provide a convenient means of surveying the damage incurred in the high-yield oil patch in Autumn 2018. On Oct. 24 they were 93¾ bid, 94½, a trader said.

Bonds of Whiting Petroleum Corp., which according to the investor have remained reasonably well-bid, saw even more improvement on Friday morning.

The Whiting Petroleum 6 5/8% senior notes due January 2026 were up 2 points at 96¾ bid.

All in all, it’s a modest rally amid the wreckage, a trader suggested, noting that at Thursday’s close high-yield energy spreads were a whopping 201 basis points wider since Oct. 3, according to the JP Morgan High Yield Index.

Since that date the high-yield energy sector is down 6.17% and is by far the hardest hit sector in the index during that interval, the source added.

Away from energy, bonds of Bombardier Inc. improved on the back of news that its key aviation and railroad businesses appear on track to help the Montreal-based company realize 10% revenue growth in 2019, roughly in line with analysts’ expectations.

The Bombardier 7½% senior notes due December 2024 were up a point on Friday at 96 bid, the fixed income investor said.

Meanwhile the shutters remained up in the new issue market on Friday and are unlikely to come down before the new year, sources say.

It would not be easy to motivate investors to take part in a new deal calendar during the brief time a potential late-year issuance window might remain open, an interval that some calculate to be as small as one week, following Friday's close.

Investors have realized meager returns, if any, in the year to date, a senior syndicate banker recounted.

Playing a new deal calendar, which might provide a modest year-end improvement, could just as easily erode those returns, the source said.

Thursday outflows

The daily cash flows of the dedicated high-yield bond funds were relatively flat but negative on Thursday, according to a trader.

High-yield ETFs sustained $51 million of outflows on the day.

Actively managed high-yield funds saw $10 million of outflows on Thursday.

News of those daily flows follows a Thursday afternoon report that the combined funds sustained $829 million of outflows in the week to Wednesday's close, a heavier than expected weekly outflow, the trader said.

© 2015 Prospect News.
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