Energy Company Bonds Lengthen Maturities—a Threat to Investors, Report Says

Oil and gas corporations are issuing more long-term bonds these days—which could be a problem for investors if demand for fossil fuels falls, as widely expected, hurting the companies’ ability to service debt obligations.

That’s the scenario painted by the Anthropocene Fixed Income Institute, a non-profit research organization that focuses on the cost of capital in a sustainable future. In its view, investors in oil bonds are not being compensated for the risks they are taking to hold the obligations for extended periods, when the viability of the issuers is questionable.

“There are direct financial risks to ‘business-as-usual oil’ production strategies, where losses due to stranded fossil-fuel assets are estimated to exceed $1 trillion” as of 2050, an Anthropocene report warned, citing International Energy Agency data

Investment-grade corporate bonds average a 7.6-year maturity but energy companies have lengthened theirs mightily: France’s TotalEnergies, for instance, has upped its maturities almost fourfold over the past two decades, to an average 22.1 years. ConocoPhillips last August floated a $2.7 billion bond issue, with maturities ranging from 10 to 40 years. Shell has steadily issued 30-year bonds since 2010, an escalation from much shorter maturities in prior years.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

By locking in relatively low yields now for 30 years or more—the 30-year investment-grade corporate bond yield averages 5.55% annually, not that much higher than the five-year yield of 5.12%—the energy companies are banking on decades of profitability ahead and seeking to pay for expansions now. Conoco issued the debt to help it buy a tar sands company.

Energy producers have seen “average maturity nearly doubling from 2015 to 2019 and [again] from 2020 to 2024. This has lengthened investor exposure to oil and gas credit, in a time when the long-term trajectory of their businesses is most in question,” the report noted.

Oil and gas producers insist that demand for carbon-based energy will not drop as steeply as IEA thinks, the Anthropocene study stated: Norwegian energy giant Equinor, for example, projects Brent crude will fetch $68 per barrel in 2050 (inflation adjusted) and the IEA estimates just $28, figuring that renewables will be dominant then (Brent is $83 now).

Of all energy bonds, Anthropocene wrote, “over half will need to be refinanced in the coming years, amid concerns that investors may look for higher risk premia to compensate for taking on growing transition risk.” In other words, the energy companies could be boxed in, unable to take advantage of any lower rates in the future. The study projected that, for a refinancing, future investors would insist that they receive higher-than-market rates for new bonds.

The report concluded that for “investors, this increases exposure to this sector beyond climate target dates and has the potential to increase risk through perpetual instruments if the funding environment for oil producers deteriorates.”

Shell, Conoco, Total and the American Petroleum Institute, the industry’s trade group, did not return requests for comment.

Weak Companies’ Low-Yielding Bonds Set to Hit Maturity Wall

Irony: BlackRock, Shunned by U.S. Energy-Producing States, Teams Up With Oil-Rich Saudi Arabia

Tags: Anthropocene, Bonds, Brent crude, climate, ConocoPhillips, International Energy Agency, oil and gas, Shell, Total

Octopus Energy, the largest electricity provider in the U.K., announced on Tuesday that it had raised $370 million in a new investment round lead by the Canada Pension Plan Investment Board and Generation Investment Management, existing stakeholders in the company.

The valuation of Octopus Energy increased by 15% following the round, bringing its valuation to $9 billion. Generation Investment Management increased its share of the company to 13%, with backing from Australia’s Aware Super and another unidentified U.S. pension fund. CPPIB will increase its stake of Octopus Energy to 12%.

Following the investment, Octopus Energy plans to expand its product offerings in the U.S., including its data and machine learning technology platform, Kraken. The company previously raised $800 million in a funding round that closed in December. Octopus energy had raised more than $2 billion over the past eight years.

“It is clear that Octopus is a generational opportunity. The company has accelerated ahead of its U.K. peers in energy and in Kraken has developed the first credible digitization platform for utilities,” said Tom Hodges, co-head of private equity at Generation Investment Management, in a press release. “We’re backing the world-class management team and the thousands of talented people in the Octopus Energy Group as they transform multiple industries at once, and it’s a pleasure to work with pension funds including Aware Super to deliver this huge potential.”

For more stories like this, sign up for the CIO Alert newsletter. 

“Through this increased commitment to Octopus Energy, we are pleased to support the business as it enters this next period of growth,” said Bill Rogers, managing director and global head of sustainable energies at CPPIB, in a press release. “As a pioneering, and tech-enabled energy company, Octopus Energy has an expanding global footprint and remains a leader and innovator in the energy sector, through both its customer propositions and its support of the global energy transition.”