We have spent much time blogging about the oil and gas industry. It is financed in large part by junk quality debt – what we call shale bonds. In recent years, exploration and production companies in the energy industry have raised hundreds of billions of dollars in working capital to pursue new production. Much of that comes from shale fields.
Unfortunately, these companies have over – borrowed and oil prices have plummeted. That combination is lethal to holders of these oil and gas bonds. Some investors are institutional but much of the debt has been purchased by individual investors hoping to make a decent rate of return and obtain some income to help sustain them through retirement.
Several oil and gas companies have already defaulted and many more defaults are probably just around the corner. Why? Energy prices are hovering in the mid $40’s for a barrel of crude oil. Many experts think the price is headed to $30 or $35 per barrel. Most energy companies can’t pay their bills unless the price exceeds $60 or even $70 per barrel.
An article yesterday by popular financial commentator Porter Stansberry said,
“Nearly all the growth in the U.S. high-yield [junk] bond market over the last decade is related to oil and gas exploration and production. Since 2010, more than $500 billion worth of new corporate debt was raised for U.S. onshore oil and gas producers. It’s this capital that financed the oil boom… These debts cannot be repaid with oil prices at less than $60. And yet they’re all coming due between 2016 and 2020.”
Unfortunately, many older Americans and folks looking for income and preservation of capital invested in these junk grade bonds. If a stockbroker or other financial professional recommended you invest in oil and gas bonds and didn’t explain the risks, you may be entitled to recover any losses.
Historically, oil prices have been very volatile. That alone makes most of these high yield bonds unsuitable for many investors. Why? Because most of these bonds required a high price of oil in order to make the bond payments.
Brokerage firms have a duty to perform due diligence on the products they recommend and only sell products that are suitable to their clients’ needs. Putting junk grade oil and gas bonds in portfolios of retirees or those looking for safety is a clear violation of industry best practices and rules.
MahanyLaw – America’s Stockbroker Fraud Lawyers
[Most shale bond investment loss cases handled on a contingent fee basis. Minimum loss generally $250,000. Some exceptions may apply.]