Fixed-income energy analysts on the buy- and sell-sides are concerned that continued warm weather this winter could result in an excessive supply of natural gas, driving down bond prices of issuers that are not adequately hedged in the futures market. Because a number of companies that store gas are required to withdraw excess supply at the end of the heating season, the market may see a sudden flood. "Natural gas storage levels are extremely high, and if they remain high into the spring, it could be negative for prices," says Ted Izatt of Lehman Brothers, the top-ranked investment-grade energy analyst on the 2001 Institutional Investor All-America Fixed-Income Team. Izatt says Burlington Resources and Devon Energy are two of the most vulnerable companies. Burlington Resources 6.5% notes of '11 were bid at 180 basis points over Treasuries last Tuesday, while the Devon 6 7/8% of '11 paper was bid at 225 basis points over the curve.
A buy-side fixed-income analyst in the Northeast says he is also concerned about natural gas storage levels, particularly as he says a number of meteorologists are expecting the warm weather to continue through the winter. Though he believes Burlington and Devon are adequately hedged, he thinks Occidental Petroleum and Kerr McGee are at greater risk. Occidental's 6.75% notes of '12 were bid at 150 basis points over Treasuries last Tuesday, and Kerr McGee 6.875% notes of '11 were bid at 175 basis points over the curve. He says his firm does not own these credits, however.