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At what cost: Oil & gas loan secondary market prices climb in tandem with oil prices

While most sectors have been negatively impacted by the events unfolding in Ukraine, one notable gainer has been the oil & gas industry, which has seen bids improve more than 5 points since 1 February to 95.40, as the price of Brent crude oil surges above USD 130 per barrel. Booming demand for natural gas in Europe, now contending with sanctions on Russian energy exports, is driving prices sky high.

In the wider US secondary market, average bids on term loans have tumbled 156 basis points (bps) since hitting a high of 98.11 in January, as a combination of rampant inflation and escalating tensions between Russia and Ukraine sends jitters through financial markets. It is the only major sector to see secondary pricing rise at this time, given increases in the price of oil generally push up the cost of doing business for traditional borrowers, and in turn send loan prices lower.

Back in the game: Oil producers set to benefit from Russian energy sanctions

Oil producers are jumping on the current situation by pushing for renewed investment in oil & gas infrastructure after several years of waning interest, as investors and corporates alike slowly transition to green sources of energy production. With secondary pricing now supportive of primary issuance, it is possible that US producers will swoop back into the market in an attempt to build out American energy production.

Debt investment in oil & gas companies shrank to USD 439.2bn in 2021 from USD 626.3bn issued in 2014. Loans issued to support exploration and development activities have similarly declined, slumping 55% last year to USD 79.2bn from a heady USD 175bn in 2014.

Too little, too late: Explosion in debt supporting green and ESG issuance not enough to bridge gap

Investment in green and environmental, social and corporate governance-linked (ESG) debt has ballooned in recent years, spiking 423% in 2021 to USD 56.1bn, tapping a growing pool of environmentally-conscious investors, who believe that applying such standards to portfolios has the potential to increase long-term returns.

While the current situation in Ukraine has distressed energy markets, building resilience into the US economy may prove to be a more profitable route towards energy independence. The nation’s first commercial-scale offshore wind farm is currently under construction in New York, with a further 4,300MW of wind power being developed in the state. Investment in such projects reduces the impact of oil prices on the wider economy, and brings the nation closer to achieving the goals set out in the Paris Climate Agreement.