Investors solicited by their financial advisor to invest in high-yield or “junk” bonds issued by oil and gas producers are in many instances facing sharp declines in investment principal, and therefore may have claims to recover their losses through FINRA arbitration or, in some cases, litigation. Energy sector-related investments are, by nature, risky because they are exposed to commodity volatility. As such, investing in the oil and gas sector may be unsuitable for certain investors.

As we have recently discussed, the U.S. oil and gas industry has been severely challenged during 2020 due to earlier COVID-19 related lockdowns and an ongoing decrease in travel, especially airline traffic. Amplifying trends that were already in play following the 2016 shale downturn, oil prices have remained below their previous mid-decade highs and have fallen even further this year, with prices for West Texas Intermediate (WTI) crude oil, an industry benchmark, now hovering around $40 per barrel. Unable to operate many existing wells or drill new wells at that price point, dozens of upstream exploration and production (E&P) companies, as well as some midstream transport and oilfield services companies, have declared bankruptcy this year. According to publicly available information, approximately 100 companies across those sub-sectors have declared bankruptcy this year through October 2020, having more than $90 billion in secured and unsecured debt.

With respect to the E&P side of the industry, in which companies often assume large debt loads to fund oil and gas exploration activities of varying risk levels, there have been some significant bankruptcies of major publicly traded players. The largest of these cases in 2020, to date, was shale driller Chesapeake Energy Corporation (OTC: CHKAQ), which filed for bankruptcy protection in Texas in June with nearly $12 billion in secured and unsecured debt. The company’s stock price trades, at the time of this writing, over the counter at approximately 98% below its 52-week range high. Another notable bankruptcy was Oasis Petroleum Inc. (OTC: OASPQ), which filed in Texas in September with nearly $2.3 billion in secured and unsecured debt. The company’s stock price trades, at the time of this writing, over the counter at approximately 88% below its 52-week range high.

Among the securities issued by oil and gas companies such as Chesapeake and Oasis are corporate bonds intended to fund ongoing operations and other business activities. Depending on the issuing company’s creditworthiness, the bonds may be below investment grade and therefore classified as high-yield or junk bonds. In some instances, financial advisors may recommend such high-yield bonds to investors seeking enhanced income, particularly in the prevailing low interest rate environment. Unfortunately, high-yield bonds, which represent the debt financing of companies rated below investment grade by the primary rating agencies (Moody’s and Standard & Poor’s), carry considerably more issuer risk than traditional fixed income products. According to recent data, 14% of the $1.1 trillion high-yield bond market in the U.S. is comprised of energy sector bonds. In the context of oil and gas investments, where commodity volatility is a significant concern, high-yield energy bonds may present outsized risks for some investors.

When a financial advisor recommends an oil and gas investment to a customer, the investor must be made aware of the volatile nature associated with the underlying commodity. In addition, the advisor has a duty to determine if the investment is suitable in light of the customer’s profile and stated investment objectives. In instances where an advisor unsuitably recommends a risky oil and gas investment, or where the investor’s portfolio becomes overconcentrated in oil and gas, then the advisor and his or her employing firm can be held liable for investment losses.

Investors who have suffered losses on oil and gas investments—including publicly traded stocks, speculative energy bonds, as well as private, unregistered investments—may be able to recover their losses through arbitration before FINRA, or in some instances, litigation. The attorneys at Giarrusso Law Group LLC have extensive experience with oil and gas investments, including energy stocks, bonds, as well as more esoteric financial products. Investors who believe they may have a claim are invited to contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, confidential consultation.