Oil companies benefit from Fed bond purchases

The US Federal Reserve is prepared to spend at least $24bn to purchase corporate bonds issued by oil and gas companies as part of a broader effort to support US corporations' access to financial markets amid a severe recession.

Oil and gas companies are not the only beneficiaries of the $250bn Secondary Market Corporate Credit Facility. But almost 80 upstream, midstream and service companies are eligible to have their corporate bonds purchased by a Fed facility that is designed to boost liquidity in secondary markets. The Fed will purchase corporate bonds in a way that allocates 9.5pc to the energy sector.

Since 16 June, when the facility became operational, the Fed spent $18mn to purchase bonds issued by Chevron and ExxonMobil, independent producer Diamondback Energy and midstream operator Energy Transfer Partners, according to a report to Congress the New York Fed submitted yesterday.

The Fed has said it would purchase bonds that were rated investment grade as of 22 March, even if subsequently downgraded below investment grade — the lower threshold for eligibility is Moody's Ba3 rating or S&P's BB-. The program runs out on 30 September.

The bulk of funds spent through the program to date has been invested in exchange-traded funds, rather than direct bond purchases from the secondary market. As of 24 June, the Fed has bought $8.7bn in corporate debt covering most sectors of the US economy.

A separate Fed program, which can spend up to $500bn of taxpayer-backed funds to purchase new corporate bond issuances, began operations today.

The bond purchase programs have taken more than two months to become operational since their announcement in March, when economic disruptions because of nationwide measures introduced to contain the Covid-19 pandemic severely curtailed bank lending and trading in bond markets. The trillions of dollars pledged by the Fed and the Treasury Department since then have increased liquidity in most financial markets even though a portion of that amount has been spent to date.

"The mere announcement of these facilities unlocked markets," treasury secretary Steven Mnuchin said last week. "We have had unprecedented corporate issuances — companies like Boeing that we thought would come to us raised $25bn without a penny of taxpayer money."

Small- and medium-sized targets

The Fed's "Main Street" program that will make up to $600bn of taxpayer-backed loans available to small- and medium-sized companies, including oil and natural gas producers, likewise has not fully started operations yet. The administration once viewed it as a primary vehicle for helping oil and gas companies during a severe price downturn.

But small and medium oil and gas companies have made use of a "payroll protection program" underwritten by the Small Business Administration. Mining companies, a category that includes oil businesses, have been able to borrow at least $4.5bn under the program as of 27 June, which allows the recipients not to repay the government if the loan is used to prevent layoffs.

Half of the 160 oil and gas companies in a recent survey by the Dallas Fed said they applied for government assistance under the payroll protection program. Only two have expressed interest in the Main Street lending program.

Some oil and gas producers have also been able to take advantage of a change in US tax laws that Congress enacted as part of its stimulus legislation, allowing them to claim retroactive corporate tax refunds for net operating losses incurred since 2018.

By Haik Gugarats