Another blow to come as banks review energy financing.
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.