Friday, 18 March 2016

Bonds vs Equity vs Oil

by Will Forbes

Despite the low oil prices and Genel's recent significant reserve downgrade, today's announcement by Genel that it will be buying back a portion of its outstanding debt is a testament of the management's confidence in the business and the benefit of the company's strong balance sheet. The 7.5% coupon bonds were trading at 55% of the issue price yesterday and implied a yield to maturity of around 30%, a material discount.


Genel
Bond (green), Equity (grey) vs oil price (dotted) for Genel since the peak of oil prices in 2014 (22nd June 2014)

Given this action it is perhaps worth examining the performance of shares vs bonds for London listed companies. We choose as a base date the recent peak of oil price (22nd June 2014, when WTI was $107/bbl)

It is clear that the equities have been decimated by the oil price fall, with most around down around 90%. Bonds, given their greater security, have fared better.

Interestingly, despite the recent bounce in oil prices, only Tullow and Premier have seen both the share and bond following suit. The Enquest bond has tracked the oil price, but the equity hasn't. Genel and Gulf Keystone are seen in a different light, with continuing declines in bond/equity pricing since January.

This suggests that the bounce in crude is still not enough (in the eyes of the market) to materially help their prospects - perhaps contradicted by Genel management move to buy back the bond today. 


Enquest
Enquest management have kept the option open to buy back bonds, though only once Kraken has started up in 1H17
Bond (green), Equity (grey) vs oil price (dotted) for Enquest since the peak of oil prices in 2014 (22nd June 2014)

Tullow
Tullow is cutting capex materially, though ongoing development of TEN means continued net cash outflows in 2016.  
Bond (green), Equity (grey) vs oil price (dotted) for Tullow since the peak of oil prices in 2014 (22nd June 2014)

Premier
Premier management have stated that deleveraging is a key focus  in the short term.
Bond (green), Equity (grey) vs oil price (dotted) for Premier since the peak of oil prices in 2014 (22nd June 2014)


Gulf Keystone
Gulf Keystone management have said that it faces "material uncertainty regarding meeting its debt obligations". Consistent operational performance has been blighted by its ability to sell its crude and recover receivables from the KRG.
Bond (green), Equity (grey) vs oil price (dotted) for Gulf Keystone since the peak of oil prices in 2014 (22nd June 2014). Gulf Keystone holds a convertible bond and high yield bond.


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