The relationship between equity prices and credit risk typically depends on the prevailing risk appetite regime. For asset prices, the ‘Risk On’ phase is one where high-risk assets are the strongest performers, and vice-versa for ‘Risk Off’. Exhibit 1 suggests that the Oil & Gas industry has moved strongly into the ‘Risk Off’ phase over the past year.
Exhibit 1 Average 6M Change in Share Prices for Oil and Gas companies by CBC*
Exhibit 1 shows that:
1) For the period February 2016 to August 2016, despite the oil price hitting major lows, the share prices of non-investment grade Oil & Gas significantly outperformed investment grade stocks. The average share price return on non-investment grade companies was +42% compared to +19% for investment grade entities.
2) Over the period August 2016 to February 2017, the two groups showed similar performance.
3) Between February 2017 and August 2017, non-investment grade companies have underperformed with an average share price return of -20%, compared with +3% for investment grade.
The oil price has been range-bound for the past year but generally weak. The hurricane season has had a significant, if temporary, impact on Gulf output, and OPEC have signalled continued efforts to maintain prices, but investors are clearly reluctant to bet on sustained higher prices for now.
*CBC = Credit Benchmark Consensus; a 21-category scale which is explicitly linked to probability of default estimates sourced from major banks. A CBC of bbb+ is broadly comparable with BBB+ from S&P and Fitch or Baa1 from Moody’s.
Disclaimer: Credit Benchmark does not solicit any action based upon this report, which is not to be construed as an invitation to buy or sell any security or financial instrument. This report is not intended to provide personal investment advice and it does not take into account the investment objectives, financial situation and the particular needs of a particular person who may read this report.
