Another blow to come as banks re­view energy fi­nanc­ing.

The McLeod River Post - - Front Page - Ian McInnes

Oil prices have re­cov­ered some­what of late and at the time of writ­ing West Texas In­ter­me­di­ate (WTI) was around the $49.50 a bar­rel mark and eas­ing up­wards. A year or so ago that num­ber would have seen as dis­as­trous but now it may be taken as some small en­cour­age­ment.

Many oil and gas com­pa­nies that op­er­ate in our patch are based in the U.S. Banks re­view­ing their loans and credit is a rou­tine busi­ness and up un­til re­cently with the oil and gas busi­ness it was prob­a­bly lit­tle more than a rub­ber stamp as the dol­lars rolled in. That looks to have changed. I’ve read that U.S. na­tional bank su­per­vi­sory body the Of­fice of the Comptroller of the Cur­rency (OCC) has been meet­ing with banks to dis­cuss the im­pact of fall­ing com­mod­ity prices and the im­pli­ca­tions this may have for out­stand­ing loans. If the OCC de­cides that cer­tain loans need to be ear­marked as, “trou­bled,” then banks have to set aside more cap­i­tal to cover de­faults, mean­ing they will be able to lend less, which at the end of the road may mean the flow of cash to bor­row­ers could be less­ened or even stopped al­to­gether.

There is of course a risk that firms may de­fault any­way but this is even a more cer­tain di­rec­tion when the banks take the um­brella away when it is rain­ing. One might ar­gue that the reg­u­la­tor and the banks are act­ing rea­son­ably to pre­vent a set of cir­cum­stances oc­cur­ring but on the other hand in some case their ac­tions will most likely en­sure that it hap­pens. A vi­cious, last man stand­ing cy­cle sets up with usu­ally only those with deep pock­ets or very ag­ile wits com­ing out the other end.

Energy loans go­ing sour are mak­ing the news here too. I’ve read that many Cana­dian banks are re­port­ing prob­lems with oil and gas bor­row­ing. This cy­cle starts at the top with the com­pa­nies and cor­po­ra­tions and even­tu­ally fil­ters down over a pe­riod of weeks and months to em­ploy­ees and con­trac­tors, who ei­ther be­ing laid off or on short time end up hav­ing to de­fault on their loans for prop­erty, autos and other loans. Usu­ally lines of credit and or credit cards can take the pres­sure off for a cou­ple of months but then even these run to de­fault.

It’s a nasty cy­cle that I’ve seen be­fore and once the ball is rolling it’s very dif­fi­cult to stop. There will be op­por­tu­ni­ties for ac­qui­si­tions and hope­fully, em­ploy­ees and con­trac­tors can ride it out to the end. Sun­cor’s move for Cana­dian Oil Sands may be the start of ma­jor moves in the in­dus­try. At the end of the day, I ex­pect to see a much leaner and smaller oil and gas sec­tor at the con­clu­sion of all this and, iron­i­cally oil prices could re­turn to some sort of nor­malcy although I don’t ex­pect to see $100 plus bar­rels of oil again any­time soon and maybe never again.

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