New energy borrowing is actually a positive sign

Oil prices have been volatile lately, and the July 19 drop was the worst since September 2020. As a result, the energy sector has lost its status as the top performing sector in the S&P 500 this year. real estate ignoring it.

This sounds like a problem for assets like the ETF Alerian Energy Infrastructure (ENFR), but the recent weakness in the energy patch could provide an opportunity to look at funds like ENFR. One of the reasons the sentiment might turn out to be correct is the increasingly favorable underlying picture for energy companies, including middleman operators.

Believe it or not, recent debt sales by energy companies, many of which took place last year, are actually a positive sign that investors might not be missing out. Energy companies use this debt to pay off older, higher-interest bonds and strengthen their balance sheets. With the transition to renewables well underway, measures to reduce and eliminate debt at higher interest rates may prove prudent for traditional energy companies.

“Looking back, the collapse in oil prices in 2014 may have been the last ‘normal’ crisis. Oil prices fell, funding dried up, supply tightened, prices increased, banks were ready to lend again and producers invested the money to increase production, ”Irina reports. Slav for OilPrice.com.

Why this is important for ENFR

Yet unbeknownst to many investors, intermediary companies are playing an increasingly important role in the aforementioned transition to renewable energies. For example, pipeline operators are seen as playing a central role in the transition to carbon neutrality.

Stronger balance sheets and reduced debt can allow these companies to respond more quickly to green energy needs. Additionally, lenders like the fact that energy companies do not borrow to increase production of fossil fuels.

“Now the banks have softened a little on oil, but it’s an interesting twist that the current loans come with a condition not to increase production,” according to OilPrice. “Again, it makes sense. For years, shareholders of U.S. shale oil companies have complained about low returns as the companies have staked everything on output growth. Now it’s time for ROI, and shareholders want their returns.

Another benefit of borrowing from intermediary companies for reducing debt at higher interest rates is that it gives credit investors renewed confidence in paying off debt, potentially increasing the attractiveness of energy bonds and opening up perhaps the way to improvements in credit ratings.

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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.