US small-cap energy stocks hit hard by falling oil prices

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The shares of small-capitalisation US energy companies have been slammed this month by the sliding oil price, sending the Russell 2000 index into the red for 2017.

The Russell 2000 energy sector has tumbled 13.5 per cent since March 1 and is down nearly 20 per cent since the end of 2016. That represents a sharp reversal from last year, when small-cap energy companies, which generally have market values between $300m-$2bn, surged by almost a third.

Small energy producers are considered to be especially sensitive to the price of oil since many companies in the sector have borrowed heavily to drill for crude. The industry benefited substantially from the oil rebound midway through 2016.

However, US crude has dropped by 12 per cent to $47.53 a barrel since the end of February as concerns have swelled over a rise in US supply that has come even as Opec and several other major exporters agreed to a production freeze.

In another sign of the rising pressure on the energy sector, the risk premium investors demand to hold the debt of speculative-rated energy companies on Monday hit its highest level this year. The spread, which gauges the difference in corporate bonds yields and Treasuries of the same duration, clocked in at 4.54 percentage points, up 47bps since March 1, Bank of America Merrill Lunch data show.

The selling in smaller energy groups knocked the Russell 2000, the main US small-cap barometer, into the red for 2017. On Tuesday, it was down by 0.2 per cent year-to-date. It had been up by 4.2 per cent on March 1.

Larger energy companies have faced milder selling: the S&P 500 energy index is off by 3.8 per cent since March 1 and down by 8 per cent for 2017.

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