Critics See Bailout in Federal Purchase of Oil Companies’ Debt

(Bloomberg) -- The U.S. government has used emergency pandemic aid to purchase more than $355 million in bonds issued by companies in the battered oil and gas industry, according to a report being released Wednesday by critics who say the investments amount to a bailout.

The Federal Reserve began buying corporate debt to shore up the reeling economy in March. Some of the acquisitions benefited drillers, integrated and independent refiners, pipelines, and oil field services companies, according to the report, released by the advocacy group Public Citizen along with the environmental groups Friends of the Earth and Bailout Watch.

The Fed's move effectively lowered the risk of the companies' debt and they responded by issuing $60 billion in new bonds, according to the report's authors.

“The Treasury and Fed have provided a massive safety net for the oil industry, whose business model was failing before the pandemic,” said Alan Zibel, research director of Public Citizen's Corporate Presidency Project.

The aid arrived as American oil producers were experiencing the twin shocks of plunging demand because of the coronavirus and a price war between Russia and Saudi Arabia that flooded the market with oil. The price of oil has since recovered to about $40 a barrel and some companies have restarted closed wells.

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The report examined the Fed's Secondary Market Corporate Credit Facility, a program for designed to provide liquidity for outstanding corporate bonds, to which the Treasury Department transferred $25 billion to back $250 billion in bond purchases by the Fed, including in some cases “high yield debt” also known as “junk bonds.”

Twelve of 19 fossil fuel companies that received Fed investments have since been downgraded by independent credit-rating companies that assess bond risk, said the report.

In a statement, the American Petroleum Institute, a Washington-based trade group, defended the program and said it was being used as it was intended.

“The Federal Reserve took decisive, economy-wide action to support liquidity and help businesses through the economic upheaval unleashed by the Covid-19 pandemic,” Stephen Comstock, the group's vice president of corporate policy, said in a statement. “Companies and workers across all industries are benefiting from these efforts.”

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