Asset AllocationMay 9, 2024

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

The problem: Demand in coming decades will fall for fossil fuels, putting debt at risk, Anthropocene institute warns.

Reported by Larry Light

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.

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.