Fossil fuel bond issuers are wagering on a prolonged shift away from renewable energy sources, potentially exposing them to lengthy durations of risk
In the world of finance, predictions about the future of oil and the global economy are a hot topic. One such prediction comes from Josephine Richardson of the Anthropocene Fixed Income Institute. According to her research, oil will continue to play a crucial role in the global economy by 2050, as suggested by bond markets.
Richardson's paper, which can be found on the Institute's website, analyses spread curves on long-dated debt issued by major oil companies such as Shell, ConocoPhillips, and TotalEnergies. Her findings show that so far, bond spread curves display no sign of steepening, indicating a stable outlook for these companies in the long term.
However, if the International Energy Agency's forecasts for the Energy Transition prove accurate, global oil prices could drop by more than 70% by 2050. Yet, this possibility does not seem to be factored into bond markets, suggesting a potential disconnect between the financial sector and the realities of the energy market.
Meanwhile, oil companies are defying the wider market trend by extending their borrowing horizons. TotalEnergies, for example, has increased its average issuance maturity from 5.7 years to 22.1 years, with a majority of its debt maturing in 30 to 40 years, well beyond the critical 2050 deadline.
This shift towards long-term debt has been observed across the industry, with companies like BP and Eni also increasing their average maturities. The risks associated with these long-term debts are ultimately shifted to the buyers of those bonds.
Hybrid bonds, which combine elements of equities and fixed income, have gained popularity among European issuers like BP, Eni, and TotalEnergies. These bonds offer relatively higher coupons but come with their own set of risks. In poor market conditions, the maturities of long-dated hybrid bonds can be extended to very long or even perpetual maturities.
Investors in long-dated hybrids for oil and gas firms are exposing themselves to highly risky assets. A sudden market correction could result in severe losses for these investors, as seen with Credit Suisse's CoCo bonds. The claims on long-dated hybrid bonds are subordinated, meaning they will rank behind senior unsecured debt following a credit event.
Josephine Richardson will be speaking at a conference on October 24, 2024, hosted by a website. Her talk is expected to delve deeper into these issues, providing insights into climate stewardship for bonds. A podcast discussing climate stewardship for bonds featuring Josephine Richardson is available now.
It's important to note that the name of the female author speaking at the conference and the research institution she is affiliated with was not available in the provided search results.
As we move towards a more sustainable future, understanding the role of oil in the global economy and the risks associated with long-term debt in the oil and gas sector is crucial for investors and policymakers alike. Stay tuned for more updates and insights.
