Morning Commentary: High-grade oil bonds improve; Phillips 66, Kinder Morgan tighten

By Cristal Cody

Tupelo, Miss., Feb. 20 – High-grade oil bonds are trading better as earnings season winds down, according to market sources on Friday.

Phillips 66 Partners LP’s new 3.605% senior notes due 2025 tightened 4 basis points in the secondary market.

Kinder Morgan Energy Partners LP’s notes (Baa3/BBB-/BBB-) that were brought in November are trading stronger.

About 85% of the S&P 500 companies have reported fourth-quarter results, according to Barclays.

“Worries about global growth may abound, but with index spreads having already tightened 14 bps from their year-to-date wides, we expect that the benign earnings season will support further tightening,” Barclays analysts said in a note on Friday.

Energy companies performed worse than expected, with more than 60% posting a negative surprise, according to the note. More than 70% of oil companies posted positive quarterly results.

“Overall, the positive earnings surprises had a more significant effect on spreads than negative revenue surprises,” the analysts said. “As a result, we are inclined to believe that there is room for outperformance in high grade energy names, and we expect firms to continue cutting costs even if oil prices remain under pressure.”

The Markit CDX North American Investment Grade index ended unchanged on Thursday at a spread of 64 bps.

Phillips 66 notes firmer

Phillips 66 Partners’ 3.605% notes due 2025 (/BBB/) were quoted 4 bps better in early trading at 144 bps bid, according to a market source.

The company sold $500 million of the notes on Wednesday at a spread of Treasuries plus 152 bps.

The Houston-based master limited partnership owns, operates, develops and acquires crude oil and refined petroleum product.

Kinder Morgan stronger

Kinder Morgan Energy Partners’ 4.3% senior notes due 2025 firmed 5 bps to 165 bps offered, a market source said.

The company sold $1.5 billion of the notes on Nov. 24 at Treasuries plus 205 bps.

Kinder Morgan Energy Partners’ 5.55% bonds due 2045 traded flat to 1 bp tighter at 240 bps offered, the source said.

The company sold $1.75 billion of the bonds at 255 bps over Treasuries in the Nov. 24 sale.

The pipeline operator is based in Houston.

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