Energy debt investors reap gains on oil rise, but risks loom

Mon May 11, 2015 3:46pm EDT
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By Sam Forgione

NEW YORK May 11 (Reuters) - The rebound in oil prices since mid-March is paying off for holders of corporate bonds of energy companies, and investors are confident that they will outperform Treasuries this year, despite lingering risks.

U.S. crude oil prices have rallied more than 32 percent to near their highest levels of the year, last trading at about $59.25 a barrel, after a more than 50 percent drop from June 2014 through mid-March.

The gains helped the Barclays High Yield Energy Index rise 4 percent in April, its second-best month since 2011.

Even as crude oil has rebounded, investors say many credits in the energy sector remain cheap because of concerns about global demand. But more buyers might move into this area, particularly with government debt yields still low.

U.S.-based taxable bond funds had 2.8 percent of their assets invested in energy bonds as of March 31, up from 1.7 percent a year earlier, according to Morningstar.

"Treasuries are significantly overpriced in the current market while energy bonds are cheap," said Kevin Dachille, institutional portfolio manager at Eaton Vance.

Dachille said credits of offshore drillers were oversold. He owns high-yield issuers Pacific Rubiales and Pacific Drilling and investment-grade Rowan Companies PLC in his $2 billion Eaton Vance Bond Fund.

Gains in energy debt would lift the high-yield market more since energy companies comprise about 16 percent of that market, according to data from research firm CreditSights. Energy makes up about 13 percent of the investment-grade market, the firm said.   Continued...