Americans have a magical fascination with oil, probably because we have such a fascination with cars. Wars have been fought over the stuff.
And who can forget those old oil tycoon TV shows. Most everyone remembers J.R. Ewing from the show Dallas.
Well, some stockbrokers have been busy “helping” customers get their own piece of the oil patch by pedaling shale bonds. What is a shale bond? It is a security backed by the profits from shale oil and gas. Unfortunately as everyone in the world knows, oil prices are at a record low price.
Bloomberg news reported last December that some $90 billion worth of junk quality shale bonds were sold in the last 3 years. And many of the issuers have run out of money. They lose money if they sell oil at too low a price but can’t make bond payments without an income stream.
To be sure, some bond issuers such as Chesapeake Energy or Concho Resources are both well funded and have solid reserves. Others, in our opinion are pure junk:
- Exco Resources
- Swift Energy
- Rex Energy
- SandRidge Energy
- Goodrich Petroleum
- Approach Resources
- Magnum Hunter
- Sabine Oil & gas
- Halcon Resources
Stockbrokers have an obligation to understand each client’s investment needs and risk tolerance factors. Knowing those things, they can only make recommendations that are suitable for each particular customer. A few folks may have an appetite for risk and not have need for their money for many years. For those folks, shale bonds may be a perfect fit. For most folks, however, they are a bad idea.
By their very nature, shale bonds are quite speculative and not suitable for most investors. While no one could have predicted the price of oil, stockbrockers still have a due diligence duty and still must tell clients the risks involved with speculative shale bond products.
As most issuers struggle to make payments, we expect more hardships ahead and deeply depressed prices. Some companies will simply default.
If you lost money because of unsuitable shale bond investments, there may be a way to recovery your hard earned money. Although every case is different, stockbrokers are responsible for unsuitable recommendations as well as the brokerage firms that employ them. Many cases can be handled quickly through binding arbitration and without the need to advance any legal fees.
MahanyLaw – America’s Fraud Lawyers
(We have several shale bond and energy sector stories in our text searchable blog or visit our oil & gas cornerstone page here.)