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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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This Data Shows The Shale Debt Crisis Is Hitting Record Levels

The bankruptcies are continuing fast and furious across the energy sector. With the ill-effects spreading beyond just the oil and gas business — evidenced by major renewables firm SunEdison filing for Chapter 11 last month.

But the U.S. E&P sector still remains one of the biggest unknowns when it comes to bad loans. With numerous observers having recently warned about a big wave of defaults coming in this space. Related: Why Canada’s Oil Industry May Never Be the Same

And a new data point late last week suggests we may be reaching a tipping point.

That came from leading American investment bank JPMorgan. Which said in an SEC filing Friday that its holdings of potentially bad loans took a major jump over the past quarter.

JPMorgan reported on its holdings of “criticized” loans — a term used in the banking industry to refer to “substandard or doubtful” debts. With the bank saying that its criticized loan portfolio leapt by 45 percent over the last quarter — to $21.2 billion as of March 31, up from just $14.6 billion at December 31, 2015. Related: Venezuela’s Electricity Blackout Could Cut Off Oil Production

The 3-month increase of $6.6 billion was driven mainly by one sector — oil and gas. With the value of JPMorgan’s criticized oil and gas loans rising $5.2 billion over the last quarter. (Criticized loans to the mining and metals sector also jumped 55 percent during the quarter — although the total increase was much smaller, at just over $600 million.)

All told, JPMorgan’s exposure to criticized oil and gas loans now totals $9.7 billion — up from $4.5 billion at the end of 2015.

The bank did note most of these loan holders are still paying their bills. With “only” $1.7 billion worth of criticized oil and gas debt being categorized as “non-performing”. However, that was a 665 percent rise from the previous quarter — when only $222 million in loans were declared non-performing. Related: How The Debacle At Doha Marked The End Of An Era

All of which confirms what we’ve been seeing anecdotally the last few months: the E&P sector is hitting the wall when it comes to debt. Watch for more bankruptcies coming — as well as issues emerging at U.S. banks due to growing exposure to bad energy loans.

Here’s to taking cover

By Dave Forest

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