bp and ConocoPhillips: a bond spread curve ball

5 minute read

The low-carbon transition promises to lower demand for fossil fuels. But the market is not differentiating among oil & gas producers based on their production targets, suggesting transition risk is going unpriced.

Carbon Tracker, an NGO, recently published an updated ranking of oil & gas producers based on how misaligned they are with the Paris Agreement. While none of the firms assessed are on target, bp was identified as the ‘least worst’ performer and topped the ranking, while ConocoPhillips took the bottom spot.

This in turn suggests that bp is less exposed to transition risk than ConocoPhillips. However, our analysis shows that their bond curves are almost identical, with the market pricing the 10s30s forward credit risk of the two issuers at virtually indistinguishable levels.

The potential for a dramatic repricing of long-dated bond spreads is possible considering the trajectory of current climate policies, suggesting investors should carefully consider the adequacy of oil & gas firms’ transition plans when making investment decisions.

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