Capital markets bankers are alert to the possibility that growing awareness of the need to transition away from fossil fuels — acknowledged explicitly by all signatories to the Paris Agreement for the first time in the COP26 agreement in Glasgow — could begin to sap the bond market access of oil and gas companies.
Some 40% of all global managed assets are now held by institutions that have committed to a net zero emission target. Achieving those will require a rapid transition by all companies in investors' portfolios, but the highest emitters will soon come under particular scrutiny.
There are various ways of estimating emissions and attributing responsibility for them, but in the corporate bond market, carbon pollution is overwhelmingly concentrated in a few sectors. According to the Climate Accountability Institute, the top 20 oil, gas and coal companies are responsible for annual greenhouse gas emissions of 480m tonnes of CO2 equivalent, 35% of the global total. They range from Saudi Aramco with 4.4% and Chevron with 3.2% to Petrobras at 0.6%.
The big fossil fuel companies have been aware of the risks for several years, especially in Europe, and are careful to discuss their low carbon transition plans in all investor marketing.
One banker told GlobalCapital this week that some oil companies had been careful to stay away from the bond market during COP in the first 12 days of November.
One said oil companies were having to pay more to issue bonds, and that investors would begin to shun longer maturity bonds from them, because of how much oil and gas use will have to decline to avert disastrous climate change. He thought a limit of 10 to 15 years was beginning to form in investors' minds.
Oil companies are an important segment of the EMEA corporate bond market, always in the top 10 sectors for issuance in any year, and making up 7% to 14% of all corporate bonds issued.
But examining patterns of issuance over the last seven years suggests that any weakening of market access, if it exists at all, is so far confined to the high yield market.
In EMEA, most oil and gas bond issuance is from investment grade companies — ranging from 60% to 95% of issuance by the sector in any year.
Using Dealogic data, GlobalCapital calculated the average maturity of bonds issued, and the trend has been for it to lengthen. Between 2015 and 2018 it was around 10 years for investment grade companies; in 2020 and 2021 it has been close to 14.
The overall bond market environment has supported that: sustained low policy interest rates, negative government bond yields in euros and quantitative easing have all pushed investors to seek longer dated debt for extra yield. But oil companies have been well able to exploit that demand.
"I can't see any problem with an oil major going beyond 10 years," said a syndicate banker in London.
BP, which has made a particular point of lengthening its debt maturities, issued a €750m 20 year in September, as well as a $1.25bn 30 year and a $250m 40 year.
"Fifteen to 20 years is no problem for [oil companies] at all — there is still plenty of demand for bonds there because you've got the ECB," said a second syndicate official, referring to the European Central Bank's bond buying programmes. "When you start going out further to 30 years, it's going to be a bit trickier and I would maybe steer an issuer away from that. There are only a handful of buyers there. One of them is the ECB but the others are mostly done now for the year. It's not because it's an oil company, it's because of the 10 people that would buy 30 years, seven of them have communicated they're done for 2021." (See graphs - article continues below them.)
Bankers sometimes say oil and gas companies pay a slight premium to issue, compared with similarly rated companies in other sectors. But they have not suffered any very evident widening of spreads in absolute terms.
GlobalCapital estimated the average spread over government bonds of oil and gas new issues. From 2015 to 2018 it was 150bp-170bp; in 2019 it dipped to 120bp. During the coronavirus pandemic of 2020 it spiked to 240bp, but this year it has come down to 170bp again. And the average issuance this year is substantially longer than the average before 2019.
"Names like BP, Shell, Total — they're all solid investment grade rated," said a third syndicate banker. "They won't have any problem at all with market access. They might have to pay a slightly higher new issue premium, but if they came on a good day they probably wouldn't even have to do that."
The picture is tougher for high yield issuers. The US shale oil and gas sector, whose huge boom in the past decade was largely fuelled by equity and high yield debt issuance, has been a well known credit casualty for years, but that is not the result of environmental consciousness.
GlobalCapital's estimate of the average spread paid by high yield issuers in EMEA oil and gas does show some widening in the past two years, but the evidence is not conclusive. Average maturities issued by the sector have declined. But the absolute amount raised by high yield companies has risen this year.
Overall, the data and bankers' views indicate that, with the exception of the high yield market, where specific companies have definitely encountered refinancing difficulties, investors are not put off buying oil and gas bonds by fears of the low carbon transition. Either they believe the large fossil fuel companies will be able to change their business models to clean energy in time, or they believe oil and gas will continue to be needed in large quantities for decades to come.
Additional reporting by Toby Fildes
