Risky debt hot on the trail of climbing crude prices

The junk bonds that fueled the shale oil boom and led a wave of debt defaults in the bust are coming back.

U.S. drillers and other energy companies have raised about $20 billion in risky corporate debt since the end of November, when OPEC announced a plan to slash crude production. It’s another sign investors believe the worst is over as oil prices stabilize in the $50-a-barrel range, and energy companies take advantage of low interest rates to pay off older debts.

But it also marks the return of the kind of investments that weighed heavily on speculative oil companies during the 2½-year energy slump, which forced scores of companies into bankruptcy.

“It is a bit risky, and we’ve seen mistakes made in the past,” said Eric Rosenthal, an analyst at credit rating agency Fitch Ratings. (Fitch is majorityowned by Hearst Corp., the parent company of the Houston Chronicle.)

During the years of $100-abarrel oil, exploration and production companies ran up more than $250 billion in debt that required them to pay higher interests because of the increased risk. The energy industry surged from just 4.3 percent of the $1.3 trillion high-risk, high-yield debt market in 2004 to 14 percent a decade later, when oil prices hit their recent peak.

But once oil prices slid, the high costs of that debt weighed on drillers, who defaulted on obligations by the billions of dollars, including $39 billion in 2016 alone, according to Fitch. As a result, analysts warned that junk bond investors would be among the last sources of capital to return to the energy industry.

But now, as oil prices firm up, “there’s a lot more confidence in the energy industry,” Rosenthal said. “It’s the perfect time to get in.”

Bond prices have risen since last summer, according to data compiled by Bloomberg. Parsley Energy, EP Energy, Halcón Resources and others issued $7.7 billion in high-yield debt in January and February, compared with about $1 billion in the same two months last year. Halcón Resources, which emerged from bankruptcy in September, raised $850 million in February.

In December, companies including Concho Resources, RSPPermian and Chesa- peake Energy Corp. raised more than $12 billion from bond sales, the busiest month of the year, in the immediate wake of OPEC’s deal to cut oil production.

In a report Wednesday, Fitch said the energy industry’s default rate on these bonds would likely edge below 17 percent in February, down from a peak of almost 20 percent last month. It could fall to 3 percent by year’s end.

So far, only Vanguard Natural Resources defaulted on debt in February, Fitch said. The Houston exploration and production company filed for Chapter 11 bankruptcy protection earlier this month, with a restructuring agreement with creditors to cut nearly a third of its $2.3 billion in debt.

Fitch expects the market to stabilize, in large part because many of the companies expected to default already have. But Rosenthal added: “There will be a little bit of worry here and there.”

“It is a bit risky, and we’ve seen mistakes made in the past.” Eric Rosenthal, Fitch Ratings