With crude oil prices falling below $50 a barrel, high yield oil stocks are becoming more and more susceptible to a meltdown triggered by oil prices that have plunged by over 50% since 2014's third quarter.
In December, CNN predicted that some shale oil companies would not survive this dramatic drop, noting that as oil prices fall, many of these smaller companies may have trouble securing financing. CNN noted that big names like ExxonMobil and Chevron often have greater financial flexibility to keep them afloat during tough times, but smaller players may not.
For instance, one smaller company—Arc Logistics Partners LP—reported a 2013 net income of $12.8 million. Gas giant ExxonMobil's net income for 2013 was $32.58 billion.
Oil and gas pipeline operators such as Arc Logistics Partners LP are often structured as Master Limited Partnerships (MLPs), which enjoy lower costs by passing tax obligations onto the shareholders. As a tradeoff, the MLPs often offer very high dividend yields, such as Atlas Pipeline Partners LP (APL)'s 9.45% yield.
High-yield bonds are also at risk of defaulting because of the profits plunge. Seadrill Limited (SDRL) is one such bond to suspend its dividend all together while Canadian Oil Sands has cut its dividend by nearly 50%.
The Wall Street Journal noted that energy partnerships EV Energy Partners, Vanguard Natural Resources, Breitburn Energy Partners and Linn Energy all have seen their shares drop by over 50% since June 30, 2014.
Linn Energy and BreitBurn Energy Partners LP both cut their distributions while LinnCo LLC experienced a dividend cut.
Citi, for one, has predicted that further distribution cuts by similar MLPs appear "imminent."
This means that banks and credit systems are also at risk if energy company defaults come to fruition, while the threat of severe turmoil could cause some banks to batten down the hatches of lending. Wall Street Daily warns of such banking firms with a high percentage of energy lending, such as BOK Financial (18.4%), Hancock Holding Company (12.2%) and Cullen/Frost Bankers (11.7%). The higher the percentage of energy lending exposure, the greater effect financial problems in the oil/gas industry will have over the financial institution.
Banking exchange-traded funds (ETFs) that include any of these high-percentage firms, such as the SPDR S&P Regional Banking ETF (ticker symbol KRE), may also be at risk. KRE's primary benchmark is the S&P Regional Banks Select Industry Index. This index contains BOK Financial, Cullen/Froster and Hancock stocks.
Junk ETFs are also experiencing fuel-related turmoil as energy bond sales climb due to riskier oil investment prospects and still-falling crude oil prices. In turn, these energy bonds experience greater yields to compensate for increased risk as the prospect of defaults and restructuring grows.
For example, the 13.6% oil-and-gas exposed iShares High Yield Corporate Bond ETF has lost 5.6% since mid-2014 while the SPDR Barclays High Yield Bond ETF (which trades under JNK) is down nearly 7% in the past half-year.
Because interest rates are presently low and expected to remain that way for some time, interest in the higher-yield and rate-of-return junk ETFs and the MLPs has grown over the past year, which, given the tumbling price of oil, may prove costly to investors.
Other such MLPs include Blueknight Energy Partners L.P., Buckeye Partners L.P., Boardwalk Pipeline Partners L.P., Cheniere Energy Partners L.P., DCP Midstream Partners L.P., Enbridge Energy Partners L.P., Enbridge Inc., Enable Midstream Partners LP, El Paso Partners Pipeline L.P., Energy Transfer Equity L.P., Energy Transfer Partners L.P., Frank's International N.V., Inergy Midstream LP, Marlin Midstream Partners LP, Genesis Energy L.P., Holly Energy Partners L.P., Kinder Morgan Inc. and its Kinder Morgan MLP family, Magellan Midstream Partners L.P., MPLX LP, NuStar Energy L.P., NuStar GP Holdings LLC, Oiltanking Partners L.P., Oneok Partners L.P., Pembina Pipeline Corp. Ordinary Shares (Canada), Plains All American Pipeline LP, Plains GP Holdings LP, QEP Midstream Partners LP, Regency Energy Partners L.P., Spectra Energy Partners LP, Sunoco Logistics Partners L.P., Targa Resources Partners L.P., TC Pipelines L.P., Tallgrass Energy Partners LP, Tesoro Logistics L.P., Transmontaigne Partners L.P., Valero Energy Partners L.P., Western Gas Partners L.P., Williams Cos., and Western Refining Logistics LP.
If misleading investment advice, overconcentration in high-yield securities, or overaggressive solicitation and a lack of broker-side due diligence or excessive risk taking given your investment objectives and risk tolerance preferences has brought forth an investment in any MLP, junk bond, bank, ETF, or other high yield oil and gas stock whose performance has proven harmful to your investments, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.