In a difficult year for primary bond issuance, the likes of Equitrans Midstream, Vermilion Energy, Hess Corporation and Hilcorp Energy have all pulled off successful refinancings. Callon Petroleum joined them on Thursday with a $600m deal.

This reversal in fortunes may be frustrating for ESG-focused funds that are naturally underweight fossil-fuel credits. But despite the increasing popularity of ESG investing in recent years, plenty of buysiders are seeing the sector in a new light.

“The one sector in HY that is supposed to not be defensive at all but that has been the rock this year is energy,” said Jeremy Burton, a portfolio manager at PineBridge Investments.

“Fundamentals coming into this year were pretty strong in high yield energy to begin with, and they have just gotten better. Companies are printing money and they are paying down debt, most of them.”

For anyone who’s been following US high yield over the past decade (and is therefore used to seeing energy bonds trade at a discount) this is a remarkable sight.

In the wake of the 2015 oil collapse, soaring energy defaults dragged down the entire high yield market. A wave of painful restructurings followed, as companies that had loaded up with debt were forced to adapt to the reality of lower energy prices.

In the years that followed, many energy companies sought the backing of bond investors and found them less than receptive.

Now, a growing number of bond funds are actively engaging with energy company CFOs and treasury teams, and offering to sell their debt back to them on the open market.

“Energy companies have really gotten the gospel in high yield since the 2015 energy crisis,” said a portfolio manager. “They have changed their ways.”

“Because of ESG, energy companies are acting a lot more like tobacco companies. They appreciate the fact that they are not going to be able to pull capital from external sources for much longer.”

Cynics might point out that this wave of ESG pressure — which, at least in anecdotal terms, has accelerated since 2020 — came alongside another sharp slump in energy prices.

“When oil went negative in the immediate post-Covid shock, that really scared the industry straight,” said Bryant Dieffenbacher, a portfolio manager and research analyst at Franklin Templeton. “There was a lot of investor distaste for the industry.”

“When you throw growing ESG concerns on top of that, and the ramp-up in electric vehicles, there were a lot of headwinds for money managers. Combining that with very poor performance led to a moment where something had to give.”

So what now?

The burning question now is one faced by many cyclical industries: how long before energy companies give in to the pressure to grow, and once again begin to test the patience of bondholders?

The industry is already pitching itself as a solution to European countries’ dependence on Russian oil and gas, as the war in Ukraine constrains supply. Toby Rice, chief executive of EQT Corporation, recently talked of “unleashing” US liquid natural gas as a solution.

Alongside (and surely in some ways because of) this sudden tailwind for E&P companies, the ESG movement is facing something of a reckoning.

Recent moves by the likes of Vanguard (which said it would not commit to ending fossil fuel investments) and Blackrock (which said it would support fewer climate resolutions, as they were becoming too prescriptive) suggest frustration with the way the ESG movement has sprawled.

When it comes to energy, many argue that ESG has gone too far in restricting the flow of capital, or suggest that it has led to higher energy costs (the fact that the S&P 500 Energy index is up some 60% this year may also be a factor in this anti-ESG backlash).

This sudden crisis of confidence in ESG could make it easier for oil and gas producers to justify boosting output or eyeing more aggressive acquisition plans.

“We’ve seen this wave of corporate officers figuring out how to please shareholders,” said Adam Coons, a portfolio manager at Winthrop Capital Management. “I think we’re on one side of that, and we’ll see it curve back towards the medium and they won’t have to be so aggressive on cutting back capex and reducing debt.”

“This [financial discipline] will last for a while, because it’s a buzzword across the financial industry and it’s a hot-button for a lot of investors. But we’ll see it naturalize and they won’t be so aggressive.”

With high gas prices crushing consumer finances, there is also growing political pressure to lower oil prices. Increasing production (probably by loosening regulation) would certainly help.

But it’s not as easy as just turning on the taps. And that may work in the bond market’s favor, at least in the short term.

Even if management teams wanted to boost production, they would have to contend with many of the same supply chain issues plaguing other sectors — the labor, services, pipes and other equipment that go into producing a rig are all in short supply.

On top of that, management teams are likely to be more cautious after the experiences they’ve had over the past decade or so.

”I think companies might surprise the cynics who think they’re immediately going to flip to being undisciplined,” said Dieffenbacher. “The industry has been through two pretty bad default cycles and there’s a lot of pain seared into the muscle memory of the industry.”

“I think we’ll see a shift over time, once they get their debt structures in order, to returning cash to shareholders and to some extent E&P companies increasing their investment in drilling. But it’s not going to be so easy as just flipping a switch.”