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CONTRIBUTORS

Bryant Dieffenbacher, CFA

Research Analyst, Portfolio Manager, Franklin Templeton Fixed Income
United States

This is a chapter from the Franklin Templeton Institute paper, Energy transition: Accelerating investment opportunities. To read all chapters in this paper, download the complete PDF or click here.

Chapter preview

The US high-yield (HY) bond market was a key enabler of the shale oil and gas boom, with far-reaching implications ranging from geopolitics to US industrial competitiveness. Despite the positive implications of the shale boom, debt and equity investors endured two sharp energy default cycles over the past decade. The typical business model for many of the early shale-focused exploration and production (E&Ps) companies required frequent access to external financing—both debt and equity—but especially debt.

The US oil and gas industry’s track record of capital destruction during the two oil and gas default cycles over the past decade, coupled with the increasing influence of sustainability considerations, sparked some changes in how the industry may be financed in the future. In this chapter, we explore why we think HY has the potential to play an important role in funding an energy transition, including:

  • We anticipate that with longer maturities, fixed coupons and terms that allow for reasonable operational and financial flexibility, HY bonds will continue to be viewed as a cornerstone financing source by independent E&Ps.
  • The HY market has a history of funding industries and businesses that have strong growth potential but that are not mature enough to access the investment grade markets or that have already tapped out the equity, project finance or bank lending markets. The HY market may provide an impactful portion of the capital needed to fund an energy transition.
  • Private equity (PE) has also stepped back from funding E&Ps, with some PE firms shifting focus towards opportunities in renewable energy and energy transition investments, driving more development capital in E&Ps into HY.

 

This is a chapter from the Franklin Templeton Institute publication, Energy transition: Accelerating investment opportunities. Arguably, humanity’s greatest current challenge is the need to shift to low and net-zero carbon in a little less than 30 years. New technologies are accelerating the renewable energy transition while reducing environmental impacts. The renewable energy sources of today and the future require new and smarter technologies as well as the rapid creation of new infrastructure. These challenges create investment opportunities as investors have a critical role given the capital required to fund this transition. To read the full paper and explore views from across our specialist investment managers, download the complete PDF or click here.

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