Investors say falling commodity prices are causing the bonds of several energy companies to trade lower than usual on the expectation that profits will decline. They are divided, however, on whether to sell off some of their holdings, or to buy on weakness. Natural-gas futures were close to 15-month lows last week, and crude-oil was at a 14-month low.
Tom Parker, a high-yield portfolio manager at Barclays Global Investors, says certain bonds that appeared richly valued have started to come down in price. He notes that the Chesapeake Energy 8.375% of '11 were issued at $98.33 in April, but were trading at $93-94 last week. Forest Oil 8% notes of '08 traded just over par a month ago, and were at $97.8 last week. Parker would not discuss purchases he has made, but believes most bonds in the sector will come back because current commodity prices still allow energy companies to make a solid profit.
Velma Chang, investment-grade buyside analyst at State Street Global Advisors, says the firm is slightly overweight the energy sector, and is now considering moving to a neutral weighting. Smaller companies that need to de-leverage are at the most risk, she says, citing Petroleum Geo-Services as an example. That company's 7.125% notes of '28 have widened to 320 basis points over Treasuries, having traded at 300 over on May 28. State Street, she says, does not own the bonds, and is unlikely to buy them on weakness. She declined to specify credits they have bought, or will consider purchasing.