Banks more willing on shale loans
But they remain cautious after writing off billions during crude’s downturn
Bank lending that nourished drillers in the nation’s first surge of shale oil has picked up again as oil prices and profits rise, but is likely to remain well below the go-go days of the last boom even as hundreds of drilling rigs and thousands of workers pour into West Texas and Oklahoma.
Lenders like JPMorgan Chase and Wells Fargo, as well as some Houston banks, have boosted the size and number of loans fueling the U.S. oil industry’s rebound, pouring more than $40 billion in new or amended lines of credit into the nation’s energy companies in the first three months of the year.
Alongside banks, private investors and capital markets have put up another $41 billion in debt and equity in a flurry of deals that mark a reversal of fortune in the U.S. energy industry after a downturn that inflicted historic losses on creditors and forced 269 North American oil and gas companies into bankruptcy.
Still, energy bankers remain cautious after writing off billions in bad loans during the oil bust. They say they’re not lending as freely as they did during the last boom, in part because of a new regulatory effort that pushes lenders to extend less credit to oil companies, especially those that run up large debts from other sources.
The Office of the Comptroller of the Currency, one of the five U.S. agencies that oversee banking, last year issued new energylending guidelines calling on banks to account for an oil company’s ability to service all debts on its books, not just their own loans. The goal is prevent banks
from falling prey to another energy debt bubble should the oil and gas industry collapse again.
“The regulators are saying if the whole company is in trouble, it’s your problem,” said Andrew Flint, a partner at the law firm Thompson & Knight in Houston.
The OCC’s guidelines could reshape the financial landscape of the shale industry as the second boom continues, giving private equity groups and other debt investors — which offer more expensive capital than banks — greater roles as banks cede territory to satisfy regulators. If nonbank debt balloons as it did in the days of $100-a-barrel oil a few years ago, banks may have to reduce their loans to oil companies to make room for the other debt, bankers said.
“We’re all living within that new standard,” said Stephen Kennedy, head of energy banking at Houston’s Amegy Bank, a $14 billion lender. But when oil companies grow to a size that requires new bond issuances or other debt, he added, “We’ll be struggling as an industry to comply. We can’t control how much debt the company issues.”
The first quarter’s $40.6 billion in new U.S. energy loans was 7 percent higher than the same period a year ago, the worst stretch of the oil bust, according to Petroleum Listing Service, a research firm in Houston. If oil prices hold steady, Kennedy expects Amegy’s energy loans, which fell by one-third, or $1 billion, during the bust, to increase. Banks issue loans to oil producers based on the value of the reserves of oil and gas in the ground, which have gone up since oil prices rose from last year’s lows.
Still, as regulatory guidelines take hold, the lines of credit offered by the bank will come in up to 20 percent below the credit limits in the days of $100 oil a few years ago.
Last year, when oil prices fell to a 12-year low of $26 a barrel, few banks were willing to extend lines of credit to oil companies, capping the loans among larger banks at around $600 million. Now, with higher oil prices, bigger banks have inked deals for $1.5 billion to $2 billion, said Mike Lister, head of energy for JPMorgan’s corporate client banking business. Those figures are still lower than the maximum $3 billion lines of credit that large banks arranged before the downturn.
“Appetite for new loan transactions that meet the revised OCC standards is strong,” Lister said. JPMorgan Chase has extended more than $1.3 billion in new loans to more than 25 new energy clients, he added.
In the first quarter, U.S. energy companies raised some $27 billion in debt from the bond market and other non-bank sources and $14 billion in equity for to launch the decade’s second burst of domestic drilling. Globally, oil companies are expected to boost capital spending 7 percent to around $400 billion this year, after cutting investments in the previous two years, according to Barclays.
“Oil companies aren’t jumping up and down, but they’re seeing things start to get a lot better,” said David Zalman, chief executive of Houston’s Prosperity Bancshares, the holding company of Prosperity Bank, which has $22.4 billion in assets.
Still, he said, the financial industry is working through bad loans from the first oil boom. Banks have become more cautious in lending and certainly less competitive than in prior years, when they sought to grab market share by undercutting rivals with lower interest rates.
“In the past we were all so competitive,” Zalman said. “Banks should be looking at where we are today, and if prices dropped to $35 a barrel, can the company pay you back with cash flow?”
Paul Murphy, chairman and chief executive of Cadence Bancorporation in Houston, the holding company of Alabamabased Cadence Bank, said lenders will make more conservative assumptions in their loan underwriting this time around. For example, instead of stress testing a loan based on a $20 decline in per-barrel oil prices, banks will test whether the loan will hold up even if oil prices drop by $30 a barrel, he said. That means that all told, banks won’t lend as much as they did in previous years, and oil companies will rely less heavily on debt.
“We’re open today for new oil and gas loans,” Murphy said. But, he added, “It’s a high bar you must climb.”