Buyers of long-dated oil bonds beware

9 minute read

The average maturity of large oil & gas producers’ debt has nearly doubled in recent years, extending investors’ exposure to these businesses at a time when their long-term viability is most in question.

As the energy transition accelerates, certain fossil fuel companies’ estimates of future oil & gas demand appear increasingly outlandish. For example Equinor’s latest annual report assumes a price of $68 for Brent crude in 2050; far higher than the $28 forecast using the International Energy Agency’s net zero pathway.

These optimistic price estimates are anchoring production expansion plans in the here and now, which companies are funding by issuing more long-dated and hybrid debt. Some of these instruments extend beyond key climate target dates, beyond which fossil fuel use is expected to be much reduced.

For example, TotalEnergies has increased average issuance maturity from 5.7 years to 22.1 years. The value of these long-dated instruments could drop precipitously if fossil fuel prices slide below producers’ expectations.

However, analysis of the bond curves of Shell, ConocoPhillips, and TotalEnergies suggest that the elevated risks inherent in these longer-dated instruments are not being priced by the market at present.

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