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Page added on April 12, 2016
Banks Face Massive New Headache on Oil Loans
The $147 billion question for banks: Will energy companies max out their credit lines?
When big banks announce earnings starting on Wednesday, the spotlight will be on massive energy loans that most investors didn’t know much about until recently.
These unfunded loans have been promised to energy companies that haven’t yet tapped the money. Many banks historically haven’t disclosed these loans but have begun to recently following the extended slide in oil and gas prices.
In the first quarter, a handful of energy borrowers announced more than $3 billion of drawdowns against these types of loans. Those commitments are expected to trickle down to bank earnings and saddle firms with more energy exposure at a time they are trying to pare it back.
“Let’s not sugarcoat it, this is not necessarily a loan a bank wants to make at this point,” said Glenn Schorr, a bank analyst at Evercore ISI.
Oil prices have risen in recent weeks, with the U.S. benchmark settling a $40.36 a barrel on Monday, but analysts say the unfunded loans to the sector are still a headache for banks at that price.
Banks in recent months have set aside billions of dollars to cover potential losses tied to energy companies, a trend likely to continue as more loans go bad.
ENLARGE Fitch Ratings Inc. is expected to release a report this week saying that nearly 60% of unrated and below-investment-grade energy companies are likely to have loans labeled as “classified,” or in danger of default under regulatory guidelines. “It’s grim,” said Sharon Bonelli, senior director of leveraged finance at Fitch.
Banks often use a company’s proven energy reserves as collateral for loans and typically reset the value of these reserves twice a year, usually in spring and fall.
The draws made so far were done ahead of the spring redetermination process, in which banks this year are expected to cut the credit lines of energy firms by an average of more than 30%, according to a survey from law firm Haynes & Boone LLP.
Ms. Bonelli and other analysts say bank loans are increasingly vital lifelines for energy companies because other funding sources have dried up.
The $147 billion in unfunded loans have been disclosed by 10 of the largest U.S. banks, according to fourth-quarter data from Barclays PLC. The four-largest U.S. banks— J.P. Morgan Chase & Co., Bank of America Corp. , Citigroup Inc. and Wells Fargo & Co.—pledged the majority of this amount.
Smaller U.S. lenders and large international banks have made billions more of these loans.
“With oil at $60, it’s not that big of a deal. With oil at $40, it becomes more of a source of concern,” Barclays analyst Jason Goldberg said of the unfunded loans. “Will companies draw down in difficult times?”
Lenders routinely offer these commercial lines of credit to industrial companies. But the energy loans, often promised before prices started their steep decline, face a unique set of pressures.
James Dimon, J.P. Morgan’s chief executive, said in February that the unfunded loans are “the most unpredictable part of our assumptions” about the bank’s energy exposure.
Mr. Dimon also said he isn’t expecting a large percentage of the unfunded money to get drawn because most of those promised loans went to investment-grade companies that he thinks are unlikely to need access to additional cash.
Banks hold reserves against unfunded loans in addition to reserves for loans that have been taken out.
A mounting number of troubled energy firms have tapped their unfunded loans.
Denver-based oil-and-gas firm Bonanza Creek Energy Inc., for instance, in March announced that it drew $209 million from its credit facility from a group of banks led by Cleveland-based KeyCorp. Bonanza Creek’s chief executive said in a news release that the move was “a risk management decision” and praised its “committed and supportive commercial bank syndicate.” A KeyCorp spokesman declined to comment.
Tidewater Inc., which provides vessels to the offshore drilling industry, in March said it took out the maximum $600 million from its credit facility led by Bank of America. The firm’s chief executive cited “the uncertainty surrounding the future direction in oil and gas prices,” in a news release announcing the withdrawal. A Bank of America spokesman declined to comment.
To stem such withdrawals, some banks have negotiated “anti-cash-hoarding” provisions when energy firms have asked for amendments to their loans in recent months.
These clauses require the companies to use extra cash to repay the balance on their credit lines in exchange, according to regulatory filings.
But for distressed firms facing bankruptcy that can contractually do so, “you’d seriously have to consider a game plan to draw down,” said Ian Peck, head of the bankruptcy practice at Haynes & Boone.
13 Comments on "Banks Face Massive New Headache on Oil Loans"
Davy on Tue, 12th Apr 2016 6:42 am
The deflationary black hole that leads to a hyperinflationary supernova is what the banks need to worry about. The oil bubble deflation event in question is a popcorn fart in comparison.
“Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play”
http://www.zerohedge.com/news/2016-04-11/former-imf-chief-economist-admits-japans-doomsday-scenario-now-play
“Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game”
“Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory…..Analysts say this would transform the country’s debt dynamics and kill the illusion of solvency, possibly in a sudden, non-linear fashion.”
“Once markets begin to suspect that Tokyo is deliberately engineering an escape from its $10 trillion public debt trap by means of an inflationary ‘stealth default’, matters could spin out of control quickly….It might lead to an abrupt reappraisal of sovereign debt risk in other parts of the world, especially in Europe with its own Japanese pathologies of low-growth and bad demographics. Roughly $7 trillion of debt is trading at negative yields worldwide, an accident waiting to happen for the bond market.”
“Actually let’s check back in another 7 years, because now that even one of the world’s “top theoretical economists” acknowledges that the endgame for trillions in debt ends in a hyperinflationary supernova, and not a deflationary black hole.”
Kenz300 on Tue, 12th Apr 2016 8:33 am
The sooner we switch from FOSSIL FUELS to safer, cleaner and cheaper alternative energy sources like wind and solar the better.
Climate Change is real….. we will all be impacted by it.
Oil Giants Spend $115 Million A Year To Oppose Climate Policy
http://www.huffingtonpost.com/entry/oil-companies-climate-policy_us_570bb841e4b0142232496d97
joe on Tue, 12th Apr 2016 8:36 am
Thing about fiat money is that the debt is the answer. You begin with the premise that the money you own is a fiction. Then you pyramid scheme people into your ‘system’. Any drug dealer knows you have to promise benefits, and a few freebies (like planes or access to markets), then you say “you can’t pay, ok, pay me next week”. After a while and your victim hasnt paid a few times you say “hey, i was good to you and you dont pay me, now i gotta hurt you, i dont wanna do it, but you make me, its your fault”. Then you take everything they have and then force to pay you somthing forever. This is banksterism, capitalism, western society, whatever you call it. If your not indebted to large institutions with fictional money, then either sombody before you paid with fictional money or you dont own much, unless you go and dig your own gold or grow your own crop on land you either stole or borrowed for free, then you paid for it, so you cant avoid the system. There are those who take then make then sell, there are those who buy and pay and work.
steveo on Tue, 12th Apr 2016 9:44 am
This looks more and more like the subprime mortgage crash every day.
I guess we’ll get to see how well Dodd Frank works in the next year or two.
shortonoil on Tue, 12th Apr 2016 10:18 am
It now requires 78,300 BTU of the 140,000 that is in a gallon of oil to extract, process, and distribute that oil. That means that the economy is receiving less energy from that oil than what was required to produce it. As a result a gallon of oil can no longer power enough economic activity to buy all of the oil produced. Inventories grow as a result, and the price goes down!
Economists like to talk about a market balancing; the point where supply becomes equal to demand, and inventories cease expanding. Since demand can not expand, because there is not enough energy being supplied to grow the economy, supply must fall. Supply can only fall if producers stop producing some of the oil that they are now extracting. Since every producer is now attempting to maximize production to maximize cash flow in this low priced environment some to them will have to go out of business.
To bring the market back into balance means that 5% of the world’s producers will have to stop producing oil, or about 4.6 mb/d. As we have been saying, it will be the low energy providers (the high cost producers) that will go first. Shale, bitumen, ultra deep water, and high sulfur extra heavy fall into the low energy, high cost categories. Banks and investors, that have until recently, believed that oil is a magical substance that brings wealth to anyone providing it regardless of its quality, have heavily subsidized these low energy producers. Many of them will default, and the banks will begin to learn that quality is now more important than quantity.
The world’s resource base of liquid hydrocarbons is pretty gigantic; perhaps 4,200 Gb. Unfortunately, nature did not make it all equal. Just like none of Her creations are made exactly the same. Some of that resource is worth taking out of the ground – most of it isn’t! The industry has already removed most of what was worth extracting (84%). What remains are mostly insufficient energy providers, and that is what has been heavily financed.
Production will fall when a lot of producers shut their doors, and the market will begin to look more balanced. Economists, the industry, and its cheerleaders will claim that everything is back to normal, and business as usual can commence again. They will still not be recognizing that Nature has its own plans. Next year it will require 80,100 BTU to extract, process, and distribute a gallon of oil. Bankers sleep; and while they do depletion will be marching on through the night!
http://www.thehillsgroup.org/
marmico on Tue, 12th Apr 2016 11:40 am
It now requires 78,300 BTU of the 140,000 that is in a gallon of oil to extract, process, and distribute that oil.
What a crock of shit. All one needs to do is look at the production export ratios of Persian Gulf producers.
peakyeast on Tue, 12th Apr 2016 1:09 pm
Banks: We want no regulation to hinder our swindling the world.
However, please, forbid shorting and selling stocks in banks when things get bad…
And – do remember those helicopter money.
You will regret it if you do !!
Thats the ideal “free market powers” seen from a bank – perspective today.
peakyeast on Tue, 12th Apr 2016 1:09 pm
do !!= dont !!
shortonoil on Tue, 12th Apr 2016 3:24 pm
It now requires 78,300 BTU of the 140,000 that is in a gallon of oil to extract, process, and distribute that oil.
What a crock of shit. All one needs to do is look at the production export ratios of Persian Gulf producers.
FoulBreath used to play Chinese Checkers – until he lost all of his marbles.
What happened there buddy — are your Ouija Board and abacus out of sink again?
Pennsyguy on Tue, 12th Apr 2016 10:45 pm
I’ve never seen reliable EROI figues for light-tight oil, but I doubt if it’s great. I do believe that falling EROI for all fossil fuels is making the world poorer, and when storage is considered, renewables won’t allow anything near BAU due to poor EROI. Low EROI is akin to carbon monoxide for industrial societies.
Davy on Wed, 13th Apr 2016 6:30 am
“Coal Slump Sends Mining Giant Peabody Energy Into Bankruptcy”
http://www.bloomberg.com/news/articles/2016-04-13/peabody-majority-of-its-u-s-entities-file-for-chapter-11
“U.S. coal giant Peabody Energy Corp. filed for bankruptcy on Wednesday, the most powerful convulsion yet in an industry that’s enduring the worst slump in decades. The company filed Chapter 11 petitions for most of its U.S. entities in U.S. Bankruptcy Court in St. Louis Wednesday, listing $10.1 billion in debt. All of Peabody’s mines and offices are continuing to operate and are expected to continue doing so for the duration of the process, according to a statement.”
“This isn’t a death knell for coal. It’s the pains of a shrinking industry,” Cosgrove said. U.S. coal production peaked in 2008, at 1.17 billion metric tons. In recent years, it’s plunged and may fall to 752.5 million in 2016, the Energy Information Administration projected in its monthly Short-Term Energy Outlook released Tuesday.”
Kenz300 on Wed, 13th Apr 2016 8:14 am
Climate Change is real and will impact all of us….
It is time for banks to stop investing in fossil fuels…….
Climate Change is real…… utilities need to deal with the cause (fossil fuels
100% electric transportation and 100% solar by 2030
https://www.youtube.com/watch?v=RBkND76J91k
Exxon’s Climate Change Cover-Up Is ‘Unparalleled Evil,’ Says Activist
http://www.huffingtonpost.com/entry/exxon-evil-bill-mckibben_561e7362e4b028dd7ea5f45f?utm_hp_ref=green&ir=Green§ion=green
PracticalMaina on Wed, 13th Apr 2016 8:37 am
Damn, Davy you beat me to breaking the news. There is another 6billion of debt that is not going to be paid, along with more obligations the company is going to skip. The US taxpayer is going to go broke fixing bankrupt frackers and miners pollution.