It still feels too early to buy into some heavily indebted companies, said Deans of AA Deans Advisors. First, Deans said she needs to see a string of significant bankruptcy filings among energy players and master limited partnerships.
The best time to buy in is at the crisis point of restructuring, when investors can get a handle on the new terms of debt and companies’ ability to pay it down going forward, Deans said. That period is coming, especially for exploration and production companies, she added.
“My inclination is to take a barbell approach. I would own some strong players who will benefit from the shakeout in the sector, and I would start looking at names in the distressed area,” she said.
Deans said she would steer clear of companies and MLPs that are servicing existing debt with more loans, as well as those firms whose cash flow is overly reliant on commodity prices.
Investors also face a choice of buying stock, which can be wiped out when a company enters bankruptcy, or debt, which may see its value reduced but which can also be converted into new equity after a restructuring.