Oil price sell-off: The winners and losers as crude tanks

The oil price fell below $80 a barrel last week amid fears that increasing supply, driven by US shale production, would outstrip demand in a low growth environment.

However, while many speculative producers have sold off their holdings in oil producers, Kames Capital’s High Yield Global Bond fund managers Phil Milburn and Claire McGuckin believe a host of oil companies are insulated from declining prices.

Oil companies and their peers make up a large part of fixed income indices, with the sector worth 10% of the Barclays Global High Yield Index.

Despite the sharp tumble in the price of oil - driven by the shale gas revolution in the US and slowing global growth – Milburn and McGuckin believe there are a number of companies not only hedged against the recent fall in the oil price, but also in a position to benefit from M&A or strengthening credit ratings.

The $306m Kames High Yield Global Bond fund currently has a near index weight to the sector, accounting for 9.95% of their fund, but the duo’s weighting is focused on less risky businesses within the energy space.

They are overweight midstream companies – which transport, store and market oil and other commodities – as opposed to those producing them.

McGuckin said this area is ripe for M&A activity which has already benefitted the fund.

“We are overweight midstream companies, which tend to be more fee-based than commodity-exposed businesses, and underweight the independent energy companies,” he said.

“Included within these holdings are Access Midstream and Kinder Morgan, two positive alpha-generating holdings this year that have seen M&A push the bonds toward investment grade ratings, and which held up very well in recent market volatility.”

The duo are avoiding those businesses using debt to ramp up production levels given their exposure to the oil price.

McGuckin said a number of companies have used debt to try to increase production, but it is these getting hurt the most as oil declines.

“There has been a very significant amount of issuance in recent months from more aggressive ‘ramp up’ US independent energy companies, which is effectively funding investment heavily in excess of current cash flows to build out production,” he said.

“We chose not to invest in these companies (frequently rated CCC) as we did not believe that the yield on offer was reflective of the underlying risks.”

“It is the bonds from these companies that have suffered the heaviest in the recent market turbulence, and a quick rebound is unlikely as the viability of projects/expected cash flows will have to be reassessed at these lower oil price levels.”

Nonetheless, the credit ratings on some larger oil producers have improved as companies eye disposals to boost balance sheets.

“In exploration, the majority of our position is held across Chesapeake Energy and Linn Energy, two large caps with significant proportions of their production hedged for the next few years - which is a significant positive given the fall in oil prices,” McGuckin said.

“Chesapeake also announced a disposal last week that drove a ratings improvement to BB+ positive outlook from both S&P and Moody’s, which lifted its price in a market that was down significantly.”