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NEW YORK, June 1 (Reuters) - Several large investment firms are betting on U.S. energy bonds on the view that they have more room to run even after a sharp rebound in performance in 2016.
Managers at Western Asset Management Co., Putnam Investments and Voya Investment Management said they were bullish on pipeline companies, with Western Asset and Voya favoring the sector above all other energy categories, while Putnam said it favored exploration and production (E&P) credits followed by pipeline companies.
U.S. energy production and exports have surged as oil prices rebounded from lows of $26 a barrel reached in 2016 and after Washington lifted a ban on U.S. crude exports. Overall, the United States has averaged exports of 5.7 million barrels of crude oil and petroleum products over the past four weeks, up 42.5 percent from a year ago.
Anil Katarya, co-head of investment-grade credit at Voya, said energy issuers would benefit as U.S. President Donald Trump follows through on pledges to loosen environmental regulations, citing approval of the Keystone XL pipeline in March as an example.
“With energy, probably I think (it) net net benefits from the current administration now,” said Katarya, whose firm oversees about $219 billion in assets and whose roughly $136 million Voya Investment Grade Credit Fund last had more than 12 percent of its assets in investment-grade energy debt.
Katarya said he anticipated that the sector's bonds would return about 3.5-4.5 percent in total this year, and that he would be willing to buy more energy bonds during periods of weakness in the oil market.
Any further gains in energy bonds this year would be on top of last year's massive returns.
Bloomberg Barclays index data shows U.S. high-yield E&P credits jumped 45 percent in 2016 and nearly 2 percent in 2017 through the end of May. High-yield midstream bonds surged 29 percent last year and nearly 5 percent so far this year. Investment-grade E&P gained 17 percent in 2016 and nearly 4 percent so far this year; with midstream up 22 percent in 2016 and nearly 5 percent so far in 2017.
Some investors are wary of jumping into energy bonds now, after the latest fall in oil prices, with U.S. crude stuck below $50 a barrel even after rallying on Thursday due to a big weekly draw in U.S. inventories. This poses risks not just for investors in energy debt, but for the entire high-yield market, of which energy constitutes a big chunk, said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research.
"We’re expecting that oil prices could remain volatile throughout 2017, and if there is further downward pressure, that could cause greater risks for high-yield energy bonds and mutual funds and ETFs that have a meaningful exposure to high-yield energy bonds,” Rosenbluth said. He noted that the iShares iBoxx $ High Yield Corporate Bond ETF had a roughly 13 percent exposure to energy.
Michael Buchanan, who manages the roughly $580 million Western Asset Short Duration High Income Fund, said he had sold some E&P bonds to collect profits, helping reduce the fund's energy stake to above 12 percent from a peak of about 17 percent. The fund, which holds pipeline companies such as Tesoro Logistics and Targa Resources, recently increased its stake in the midstream sector.
Buchanan, deputy chief investment officer at roughly $433 billion fixed-income manager Western Asset Management Co, said pipeline company bonds still trade cheaply relative to other energy credits and prices for some could rise if their credit ratings are upgraded from "junk" to investment-grade.
Citi Research high yield energy analyst Marisa Moss offered Tesoro Logistics' notes maturing in 2020 and 2021 as an investment idea in a research note dated April 25. In a separate note dated April 17, Moss said she would be hesitant to bet against bonds of pipeline companies since she expected their prices to rise on a pickup in mergers.
Paul Scanlon, co-head of fixed income at roughly $162 billion asset manager Putnam Investments, said he favored the E&P sector followed by midstream companies.
"You still have potential for really nice relative returns," Scanlon said. "There’s a more constructive political backdrop if you’re in the energy business than there probably was under the prior administration." (Reporting by Sam Forgione; Editing by Jennifer Ablan and David Gregorio)