Two years on from the beginning of the decline in oil prices, lenders continue to tighten access to finance for oil and gas drillers. Having been burned repeatedly by false starts for oil prices, big financial institutions and bond markets are taking a more cautious approach.
New bond issuance for the oil and gas industry fell to its lowest level in the second quarter since the financial crisis in 2008-2009, a sign that credit markets are wary of getting back into the fray. In the second quarter, U.S. E&Ps only issued $280 million in bonds according to The Financial Times, a seven-year low. Also, banks only made $10.7 billion in syndicated loans, the lowest in two and a half years.
Debt financed drilling created the shale boom – between 2007 and 2014 the industry raised $860 billion from bond sales and bank loans, the FT says. Low interest rates had lenders looking for yield, and the explosive growth of shale production promised safe returns. The bust in prices has left a lot of banks nursing losses, and pulling back from new lending.
The reluctance to issue new loans appears appropriate at this point, with crude prices falling back from $50 per barrel since the end of June. A year ago, WTI and Brent appeared to rebound strongly from earlier lows, pushing above $60 per barrel. But prices collapsed again, burning lenders who jumped the gun. This time around they appear more cautious. Related: Oil Dragged Lower By Crashing Gasoline Futures
But it is not as if oil and gas companies do not need financing. Many are still spending more than they are taking in. The FT notes that the leading listed U.S. oil and gas companies slashed spending to $14.9 billion in the first quarter of this year – half of 2015 levels – but still spent more than $10 billion over operating cash flow. The cash deficit continued into the second quarter even with the rebound in oil prices.
As The Houston Chronicle reported in mid-June, smaller regional banks are staying away from the shale patch, sometimes entirely, even as the optimism among some drillers is rising along with oil prices. The article cites a comment from Geoff Greenwade, CEO of Green Bank, a Texas lender. Greenwade says that his bank is getting out of oil and gas for good after writing off $10 million in bad energy loans. “This will leave a bad taste in our mouth for years,” Greenwade said. “We don’t get paid enough on these loans to take on all of that commodity risk.”
“Credit is going to be limited for quite some time,” Paul Murphy Jr., chairman of Cadence Bank, told The Houston Chronicle. Today, private equity has a much greater risk appetite than some banks, but private equity alone cannot supply all the credit needed by the industry.
So far, at least 130 North American oil and gas companies, as well as equipment suppliers, have declared bankruptcy since oil prices began collapsing two years ago. Wells Fargo and Bank of America are sitting on particularly bad oil loan portfolios – more than half of the two banks’ oil loans are in danger of default.
"It's going to be a number of years before you get the combination of capital, oil field services, appetite and confidence for people to wade back in and want to spend a lot of money again," Douglas Petno said, CEO of JP Morgan Chase’s commercial banking business, told The Houston Chronicle. Petno said that banks would have made a $3 billion loan to an oil driller in 2013, but because of tighter lending restrictions, a similar loan would only amount to between $600 million and $1 billion. Related: Why Chevron And Shell Are Better Bets Than BP and Exxon
Banks are not just staying away from issuing new loans, but also increasingly moving to unload some of the loans in their portfolios. Bloomberg reported in June that European banks, including UniCredit SpA, HSBC Holdings Plc, and ING Groep NV have either sold energy loans or are shopping loans to buyers. Of course, with so many sellers out there, there are not enough buyers at good prices. As a result, banks are unloading loans at a loss. Bloomberg cites the example of UniCredit, which sold around $100 million in loans that it had made to a supplier of accommodation units for offshore rigs at a 55 percent discount.
Just as the U.S. oil and gas industry have posted some of the lowest new loan totals in years, European banks have only issued about $3 billion in new loans since April, the lowest quarterly total in almost a decade, Bloomberg found.
As banks pull back from the industry, obtaining finance for new drilling could be difficult. Looser credit won’t return until oil prices rebound to much higher levels. Without finance, drilling will not return anywhere close to the levels seen several years ago.
By Nick Cunningham of Oilprice.com
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We need to be realistic about the cost of extraction. Included in that cost is impact on clean water and clean air, and cost. If we're really going to be responsible, we'll include tomorrow's impact as well. People with grand kids tend to think longer term.