Legg Mason’s Ken Leech: Valuations on energy companies ‘mouth-watering’

The sell-off in energy company bonds in the high yield space has created some “mouth-watering” valuations for investors to exploit, Ken Leech of Legg Mason affiliate Western Asset has said.
Leech, Chief Investment Officer at Western Asset which manages $454.8bn of fixed income assets*, said a number of energy names had seen prices dragged lower by the indiscriminate sell-off caused by the steep decline in the price of oil.
The price of Brent Crude oil tumbled from over $100 a barrel to under half that during the last year, before a marginal recovery took it back to $54**.
Some Investors predicted a number of energy bonds would go under following the correction, but Leech said many names can survive the current downturn in the price of the commodity and had therefore been oversold.
“One change this year has been energy bonds in the high yield space, and the companies we are buying can withstand $50 oil for five more years,” he said.
“The valuations on some of the companies are mouth-watering, especially as they have the ability to cut production and costs, allowing them to weather the oil price collapse better than some fear.”
Leech, portfolio manager of the £2.5bn Western Asset Macro Opportunities Bond fund***, added that the general environment continued to be supportive for risk assets versus sovereign debt.
“Because of the low sovereign yield levels, and our increased optimism about growth, we believe risk assets may outperform sovereign bonds,” he said.
Leech added, long-dated US treasuries continue to offer value in his opinion. “The US yield curve has steepened as 30-year Treasury yields have gone up. It means we have falling yields in the short-term caused by weak data, but rising 30-year yields,” Leech said.
“It has left us with almost a 100 basis points difference between 10-year and 30-year treasuries currently, which is extraordinarily rare, and this curve may flatten going forward as the yield increase has created some value.”