3 Things Under the Radar This Week

Investing.com - Here’s a look at three things that were under the radar this past week.

1. Norway Ditches Oil & Gas, Sort Of

Independent oil and gas producers across the world have a problem, but the big global majors can breathe easy. The equities desks of many an investment bank, meanwhile, can rub their hands in anticipation.

A long-awaited report by Norway’s government recommended its sovereign wealth fund sell out of its holdings in 150 oil and gas producing companies, in what it’s styling as a reduction in the country’s exposure to oil prices.

The government avoided an unholy battle with its counterparts elsewhere in Europe by leaving off the list the state-dominated integrated oil and gas giants that are part of most pension funds’ portfolios -- Royal Dutch Shell (LON:RDSa), BP (LON:BP), France’s Total (PA:TOTF) and Italy’s Eni (MI:ENI) -- where it holds stakes of between 2% and 2.5%. It will also stay invested in Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) in the U.S., where it owns just under 1% in each.

But there is now an immediate supply overhang problem for investors in the companies on its list, many of which are popular names among U.S. investors.

They include Apache (NYSE:APA), Anadarko (NYSE:APC), Marathon (NYSE:MRO) and big names from the shale sector such as Chesapeake Energy (NYSE:CHK), Devon Energy (NYSE:DVN), Whiting Petroleum (NYSE:WLL) and LNG-focused producer Cheniere Energy (NYSE:LNG).

As with Glencore’s about-turn on coal production a couple of weeks ago, the decision both is and isn’t about climate change. Prima facie, it’s a move to disperse a very concentrated financial risk: the fund will still be sitting on billions of dollars’ worth of investments in hydrocarbons and it is seeded by money from Norway’s own oil and gas revenues.

But the risk it’s provisioning against is a permanent downturn in oil and gas prices as the world migrates to renewable sources of energy (and even, ultimately, packaging). And the main factor behind that megatrend is clear enough.

2. Alarm Rings on Corporate Credit

The Bank of International Settlements said this week slowing global growth threatens to usher in a dark era for corporate bonds that could have profound implications for stocks.

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Corporate debt in the riskiest investment-grade category, BBB, has surged since the turn of the financial crisis, a period in which the hunt for yield placed corporate debt at the height of fashionable investing.

But as fresh signs of a wobble in the global economy emerge, investment-grade rated corporate debt may face downgrades to high-yield grade the BIS said.

In the event of a potential downgrade in investment-grade bonds to junk status, many institutional investors would be forced ditch their bond holdings as they are usually mandated to hold only low-risk or investment-grade securities.

“Rating-based investment mandates can lead to fire sales,” warned economists Sirio Aramonte and Egemen Eren in the BIS Quarterly Review published on Tuesday. "If, on the heels of economic weakness, enough issuers were abruptly downgraded from BBB to junk status, mutual funds and, more broadly, other market participants with investment grade mandates could be forced to offload large amounts of bonds quickly."

The fallout from a potential selloff in corporate bonds would not only raise yields, making it more expensive for heavily-indebted companies to service their debt, but fuel concerns about the risk of defaults, sending share prices sharply lower.

This scenario is not without merit as General Electric (NYSE:GE) investors can attest.

Shares of GE plunged in November, following a downgrade of its debt to investment grade the month before, as fears grew the conglomerate's debt was at risk of being downgraded to junk status. GE has pledged to sell plenty of assets to cut its debt.

AT&T (NYSE:T), Verizon (NYSE:VZ) and Kraft Heinz (NASDAQ:KHC) are also grappling with a debt problem that could quickly turn ugly if corporate bonds come under pressure.

In 2009 default rates hit record highs, the BIS said. Corporate downgrades from 'BBB' levels into junk rose to 11.4% that year in the U.S. and 16.3% in Europe.

3. Smoke-Free Canada?

Philip Morris International (NYSE:PM) issued a profit warning that hit shares on Monday.

The Court of Appeal of Quebec upheld two class-action lawsuits against Philip Morris’ Rothmans, Benson & Hedges, as well as Imperial Tobacco Canada and JTI-Macdonald.

Philip Morris said it would be taking a post-tax litigation expenses charge of $142 million, "the portion of the judgment that it believes is probable and estimable at this time,” even though it will appeal again.

But lower down the company acknowledged it can’t estimate the eventual repercussions, which could put its entire Canadian business at risk.

“(T)here is a significant lack of clarity with respect to several factors, including the actual number of claimants, the associated administrative process for verification of their applications, further proceedings, and actions by parties to these proceedings,” Philip Morris said. “Therefore, the ultimate liability may differ significantly from this amount.”

With the rest of Canada’s provinces also suing for healthcare costs, the tobacco giant must be thinking of any and all options to avoid that ultimate liability.