CONSUELO MACK: This week on WEALTHTRACK, drilling for profits in the energy field. Portfolio managers Gib Cooper of Western Asset Management and Chris Eades of ClearBridge Investments discover opportunities created by falling oil and gas prices next on Consuelo Mack WEALTHTRACK.
Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. One of the biggest stories of last year was the dramatic decline in oil prices and every asset class connected to them. Prices of energy stocks plummeted, prices of energy company bonds, particularly in the high yield category, those with below investment grade credit ratings cratered. As you can see from this chart of America’s benchmark, West Texas Intermediate Crude Oil, a barrel of oil was over one hundred dollars last summer before being cut by more than half earlier this year, falling to a six year low.
As several savvy WEALTHTRACK guests reminded us at the time, when oil rebounds in this cycle, which it inevitably will, it will move quickly. And so it has. Although it is still nowhere near last year’s highs.
Meanwhile oil investments remain under pressure.
According to this week’s guests the decline in energy related securities represents an opportunity for investors particularly in two areas. One is in what are known as energy Master Limited Partnerships, specifically those that invest in infrastructure companies, the pipelines and storage terminals which depend on the volume of oil and gas flows not their price. MLPs as they are known have been extremely popular with investors because they are legally required to pay out most of their income to investors and their distribution rates to investors have been very attractive in a low yield environment.
The other area is the bonds of energy companies, particularly exploration and production companies which have issued billions of dollars of debt in recent years to fund their production costs. Energy bonds makeup about 15% of all high yield debt.
Our guests are J. Gibson Cooper, Analyst and Portfolio Manager at Western Asset Management, one of the country’s largest fixed income managers and winner of the Morningstar Fixed Income Manager of the Year Award last year. Cooper oversees the high yield portfolios at Western. Chris Eades is Portfolio Manager of several Master Limited Partnership portfolios at ClearBridge investments, including the flagship, ClearBridge Energy MLP fund, a closed-end fund.
I began our discussion by asking them how much of a game changer the decline in oil prices has been.
GIBSON COOPER: Well, I think it’s a game changer really from the standpoint in our market and the fixed income market. It’s certainly been one of the largest contributors to the oversupply situation. So to the extent that the oil prices declined, that’s certainly taken a lot of wind out of the sails of the high-yield market in terms of providing capital to energy companies, in terms of activity levels that are declining. So it is a game changer, and we’re seeing a real rapid and aggressive response to the oil price within the companies that we research and invest in. So it is a game changer from the standpoint, at the company level. For the market overall, it is a little bit of a typical cycle we think. We think that it is not much different than other cycles we’ve experienced.