Banks have started to cut their exposure to the U.S. shale patch, seeing more than 100 producers and oilfield services firms go bust last year and feeling the environmental, social, and governance (ESG) pressure to reduce credits to fossil fuels. While traditional lenders are cutting their losses and de-risking energy loan portfolios, alternative capital providers are stepping up to scoop up U.S. energy debt at a discount and take part in debt or equity transactions that could give them returns sooner than a loan would for a bank.
Since the oil price crash in 2020 and the downturn in the U.S. shale industry, banks have been wary of their exposure to the sector. The commodity price slump last year dramatically cut the value of the assets of oil and gas firms, against which they have traditionally obtained loans from banks.
Running for the Exit
Lenders slashed the amounts of reserve-based loans to the U.S. shale firms in the middle of last year.
But it is not only purely financial considerations that are driving reduced bank exposure to the oil and gas industry. ESG lending and aligning loan portfolios to the Paris Agreement goals are now more prominent than ever.
For example, asset manager Schroders, which holds many bonds in the banking sector, is engaging with banks to understand their fossil fuel exposure.
“Banks that are highly exposed to the fossil fuel industry face significant financial, regulatory and reputational risks as a result of the transition to a low-carbon economy,” Schroders said, explaining its rationale to identify the exposure of the banks to oil, gas, and coal.
Increased pressure from the ESG universe, coupled with years of poor returns of U.S. shale firms, have prompted several major transactions in which banks have sold energy debt to hedge funds and private equity firms.
Hancock Whitney, for example, agreed last year to sell $497 million worth of energy loans to certain funds and accounts managed by alternative investment provider Oaktree Capital Management. Hancock Whitney expected to receive $257.5 million from the sale of the reserve-based loans (RBL), midstream, and non-drilling service credits.
Hancock Whitney’s main reason to sell the energy loans was to minimize the risks to its loan portfolio.
“The primary objective of this sale is to continue de-risking our loan portfolio by accelerating the disposition of assets that have been impacted by ongoing issues within the energy industry, and have now been further complicated by COVID-19,” Hancock Whitney’s President and CEO John M. Hairston said.
At the end of 2020, Bank of Montreal decided it would wind down its non-Canadian investment and corporate banking energy business.
Most recently, ABN AMRO announced last week it would sell a $1.5 billion portfolio of energy loans to funds managed by Oaktree Capital Management and affiliates of Sixth Street Partners. The portfolio consists of loans to around 75 companies active in the North American energy markets.
With this sale, ABN AMRO is withdrawing from oil and gas related lending in North America as part of a process to wind down its non-core activities and significantly reducing the non-core loan book.
Alternative Capital Providers Snatch Oil & Gas Loans
As many banks look to reduce exposure to oil and gas lending, they divest energy loan portfolios to alternative capital providers – the so-called shadow lenders. Those capital providers, including hedge funds, are moving in to capitalize on oil and gas debt that may have been mispriced by the banks, investors and analysts told Bloomberg.
The share of debt from alternative capital providers for North American oil and gas firms’ source of capital in the next 12 months is nearly equal the share of debt from banks, according to Haynes and Boone’s Borrowing Base Redeterminations Survey: Spring 2021.
Cash flow from operations will be the primary source of capital in the next 12 months, with 24 percent, followed by debt from capital markets with 14 percent, debt from banks with 13 percent, and debt from alternative capital providers at 12 percent, found the survey, in which producers could select more than one option.
Hedge Funds Signal Confidence in Oil Price Rebound
Banks may be cutting their losses in the U.S. oil and gas sector, but alternative capital providers and investors – as holders of company debt – are betting on quicker returns by participating in debt transactions and other deals in the shale patch.
Traditional lenders have shown a growing lack of confidence in the energy sector, but hedge funds are stepping up to fill the void. Some experts believe that alternative capital providers flocking to the sector signals their confidence that oil prices and the oil market will continue to recover from last year’s shock.
“When you have hedge funds making major commitments in support of energy M&A, that must mean that they have a view on commodity prices that is above the curve,” Peter Bowden, Managing Director and Global Head of Energy and Power Investment Banking at Jefferies, told Bloomberg in an interview.
By Tsvetana Paraskova for Oilprice.com
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