Greek Vote: The Three Energy Aftershocks You Need to Know Now
In the small hours of the morning, Athens time, the Greek parliament passed a tough set of reforms as the price for another European bailout. The aftershocks of this will be felt throughout the energy sector.
However, even this tough pill is not likely to be enough. The International Monetary Fund (IMF) reported on Monday that Greece may not pull through without an absolute reduction in the debt owed. Germany has already bristled over the prospect of a creditor “haircut” and the prospects of another round of negotiations has everybody fit to be tied on both sides of the conversation.
Whether European creditors like it or not, to avoid contagion to the rest of Europe we will need a contemporary version of the Brady Bonds that allowed emerging market (mainly Latin American) countries to refinance defaulted debt some four decade ago.
What happens next will fill the streets of Greek cities with angry citizens who voted a resounding “No” barely two weeks ago only to be force fed an even less palatable “Yes” by their own government. The deal passed only because opposition pro-Europe parties voted in favor of it. But the pact is even more onerous than the package of widely unpopular reforms rejected in the referendum.
It will also leave Prime Minister Alexis Tsipras and his ruling Syriza party without a majority in the legislature, virtually guaranteeing early elections and more political disarray. Some sort of national united front will emerge to govern, but the next several years are likely to be lean ones.
There are three major effects from this Greek drama that will affect the energy market.
Lower Bond Yields Will Help Oil Producers
Some sectors of the Greek economy will undergo a managed contraction, assuming, of course, that the government actually honors the agreement made and the package passed this morning. Previous action (or, more properly, inaction) consistently put forward over the past five years makes compliance more than a passing concern. However, our primary investment interest – energy – is going to have some benefits coming.
First, the bailout package will provide relief on the wider European credit market. As I have noted previously here in Oil & Energy Investor, should Greece have defaulted it would have resulted in an elevation of interest rates, with high yield (i.e., “junk”) bonds rising faster than investment-grade debt.
Energy debt in general, and oil/natural gas production debt in particular, occupies the higher end of the junk bond market. That means the spread between interest rates would widen, with energy credit taking the brunt of that cost.
Now, the problem with energy debt is continuing even without a Greek enticement. But at least an immediate catalyst to an even worse situation is avoided. Companies are still going to be added to the prime M&A target list and projects will still be delayed. However, there will not be a feeding frenzy.
New Hope for Greek Gas Pipelines
Second, ongoing negotiations for natural gas pipelines passing through Greece (for which Athens receives some needed revenue from throughput and transit fees) will now be able to include expected domestic banking involvement and proceed as planned.
It will take a while for the Greek banking sector to be recapitalized and return to normal operations. There will also be fewer participants surviving. Nonetheless, it is essential that they participate, and the projects coming are far enough out to allow that.
The Greek Energy Companies That Will Weather the Storm
Third, and most importantly, there will be more immediate advantages provided for energy-related companies with direct access to outside hard currency proceeds. Once again, I have previously treated this matter here in Oil & Energy Investor, but it is useful to consider the specific situation that is now unfolding.
In times of such policy and financial transition, government moves depend upon foreign exchange. This would have been the case as well if a “Grexit” (a Greek withdrawal from the eurozone) had been the outcome. That scenario is less likely now, but still a possibility should this bailout fail.
Look to Greek tanker, shipping support, fuel bunkering, and offshore oil service/support companies to have the best shot of improving in the aftermath. All of these receive the bulk of their earnings from outside Greece, in hard currency, with access to European and global banking. That means they are likely to weather the storm with the strongest upside potential.
As Churchill famously put it almost 75 years ago, “This is not the end; this is not the beginning of the end. But it is the end of the beginning.”
As the smoke clears, I’ll explain how to play these developments.