• 2 hours Oil Nears $52 With Record OPEC Deal Compliance
  • 5 hours Saudi Aramco CEO Affirms IPO On Track For H2 2018
  • 7 hours Canadia Ltd. Returns To Sudan For First Time Since Oil Price Crash
  • 8 hours Syrian Rebel Group Takes Over Oil Field From IS
  • 3 days PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 3 days Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 3 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 3 days Schlumberger Warns Of Moderating Investment In North America
  • 3 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 3 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 3 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 3 days New Video Game Targets Oil Infrastructure
  • 3 days Shell Restarts Bonny Light Exports
  • 3 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 4 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 4 days British Utility Companies Brace For Major Reforms
  • 4 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 4 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 4 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 4 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 4 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 4 days Rosneft Signs $400M Deal With Kurdistan
  • 4 days Kinder Morgan Warns About Trans Mountain Delays
  • 5 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 5 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 5 days Russia, Saudis Team Up To Boost Fracking Tech
  • 5 days Conflicting News Spurs Doubt On Aramco IPO
  • 5 days Exxon Starts Production At New Refinery In Texas
  • 5 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 6 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 6 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 6 days China To Take 5% Of Rosneft’s Output In New Deal
  • 6 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 6 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 6 days VW Fails To Secure Critical Commodity For EVs
  • 6 days Enbridge Pipeline Expansion Finally Approved
  • 6 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 6 days OPEC Oil Deal Compliance Falls To 86%
  • 7 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 7 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
Alt Text

The New Challenger To Lithium Batteries

The lithium-ion battery is head…

Alt Text

The Approaching U.S. Energy-Economic Crisis

The connection between energy and…

Alt Text

Kobe Steel Scandal Could Rattle Nuclear Industry

The scandal at Japan’s Kobe…

Banks On The Hook For Bad Energy Loans

Banks On The Hook For Bad Energy Loans

Energy sector bankruptcies are mounting as we detox from the high of the shale boom, but while junk-rated energy bonds are experiencing staggering losses, and without any reprieve in site for low oil prices, some banks are still unwilling to throw in the towel—betting on a reversal of fortunes.

In 2015 alone, 42 oil companies filed bankruptcy proceedings, according to law firm Haynes and Boone. Total secured and unsecured energy sector debt moved into bankruptcy stood at a whopping $13.1 billion. According to Standard and Poor’s Rating Services, 50 percent of these oil and gas debts are considered distressed. With oil prices expected to remain low, the numbers could get much worse before they get better.

But banks aren’t necessarily viewing this in terms of dire straits, and they aren’t necessarily tightening the reigns on lending. In fact, some banks are holding out hope that the current crude oil crisis will force the industry to reduce production costs, allowing debt-laden companies to survive low prices and repay the mounds of debt taken on when times were good.

How much debt are we talking about, exactly? According to Barclays, the amount of bond debt owed by junk-rated energy producers expanded eleven fold to $112.5 billion at the height of the shale boom from 2004 through 2014. Related: Sales Tax Dispute Could Send Billions to Texas Oil Industry

Perhaps a few will adapt to the changes and endure. Unfortunately, there will be many others who will be unable to compete at today’s prices, creating a problem for banks that continue to lend to companies rated BB and lower.

Hook, Line & Sinker

In 2009, crude oil prices rose sharply and held fast until 2014. Central banks around the world pumped massive amounts of money into the economy, anticipating that the demand for crude oil would continue to increase. The oil business was a profitable one with very limited risk, which bolstered bank lending in this sector. Quite simply, everyone wanted to be in on it.

(Click to enlarge) 

Many of these debts are still outstanding today, putting the banks in a risky position.

Oil and gas companies need to regularly invest in new oil in order to continue production. With lower oil prices denting cash flows, they will be unable to operate their facilities without new loans. Related: This Could Be A Big Setback For Iran’s Oil Export Plans

This puts banks between a rock and a hard place. In order to recover their loans, they will have to keep the loans flowing, albeit at higher rates and using a more conservative approach. The other unattractive option is to cut bait and let a company default before the risks are too high. Either is risky for the lender.

According to the Wall Street Journal, citing financial research firm IPREO, oil and gas companies raised $255.7 billion through various public offerings and bond issues from 2007 through 2014. The total debt of the U.S. oil and gas companies, excluding Chevron and ExxonMobil, is expected to increase to more than $200 billion when all the 2015 financials come out. That’s a 55 percent increase since 2010—all fueled by higher oil prices at that time.

A Painful Future—For Some

Banks determine loan amounts by assigning a value to a company’s proven oil reserves using the future price of oil and gas and discounting the future cash flow. These reserves are capped at a certain percentage of the total valuation to account for uncertainties.

The banks lend only 60 percent of this total valuation, and assess this amount bi-annually to account for volatility, essentially recalculating the borrowing base and final loan amount. Related: Is China The Big Sponge That Absorbs The Oil Glut?

Until recently, both sides in the lending equation were hopeful of higher prices, so the last assessment used higher oil prices than what we are seeing today. Now that the Energy Information Administration’s (EIA) STEO has forecast $40/barrel until January 2017, the borrowing base of many companies is likely to be revised in April.

During the next review, banks are expected to throttle loans to these companies, but they will still lend enough to allow for continued operations. The risk here is that many of the new loans will turn into bad debts for the banks.

No one expects oil prices to remain low forever. The current crisis will likely result in a reduction of the supply glut eventually—one way or another. Some of these oil companies will make good investment bets for the banks when oil prices recover, but only some. And larger banks will fare better because only a small percentage of their total loans are in energy.

Watch out for the smaller banks, though—particularly those who have lent large to oil and gas. For them, the industry distress will reach a painful conclusion.

By Rakesh Upadhyay for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News