Fed clears the way for oil company loans

The Federal Reserve revamped its Main Street Lending Program in ways that will allow battered oil companies to qualify for the aid after industry allies lobbied the Trump administration.

Larger, more heavily indebted companies now can qualify and use the money to pay off prior loans under the changes the central bank announced Thursday.

The move opens the door to more oil and gas producers, said Sen. Kevin Cramer, R-N.D., who’d pressed the administration on the issue as energy companies struggle to survive an epic collapse in fuel demand and crude prices.

“With the decrease in demand and oversupply due to the global oil price war creating a valley for these highly leveraged companies, this expansion will help them bridge the gap as we look to reopen America,”

Cramer said in an email Thursday.

Environmentalists blasted the shifts they said reward oil companies that took on too much debt and were overproducing crude even before the coronavirus pandemic caused demand to crater.

“These changes directly reflect demands from polluters and their favorite members of Congress,” said Lukas Ross with the environmental group Friends of the Earth. “Long before the coronavirus, the drillers were in deep trouble. Now frackers want to pay back their debts with our money. (President Donald) Trump’s big oil bailout must be stopped.”

For weeks, oil industry advocates have warned the original program structure would prevent battered drillers from accessing capital under the program.

Sen. Ted Cruz, R-Texas, and the Independent Petroleum Association of America argued oil companies needed more flexibility to use Main Street loans to repay existing debt — something that previously was off limits but now will be allowed under some conditions.

“Banks are frozen, so I think this is the only hope to see businesses underwrite expansion or to recapitalize between now and the end of the third quarter,” said Dan Eberhart, the chief executive of oil-field services company Canary Drilling Services, which has furloughed about 200 people and implemented across-theboard salary cuts.

Maximum loan totals under the Main Street program also are being raised to $200 million — from an earlier $150 million cap viewed as too low to help oil producers.

Although the Fed changes are broad — and aren’t limited to potential oil company applicants — they directly respond to the industry’s wish list.

“The major changes announced today mirror the top requests of the oil and gas industry,” said Bharat Ramamurti, a member of the congressional watchdog appointed to scrutinize implementation of the Fed and part of Treasury’s virus-relief work.

“That raises questions about how the changes promote the broader public interest — especially when these companies will still have no real obligation to retain or rehire their workers,” Ramamurti said on Twitter.

Even before the changes, oil and gas companies with investment-grade credit ratings could secure funding through a separate program, the Fed’s Primary and Secondary Market Corporate Credit Facilities.

However, under term sheets released April 9, funding was restricted to firms that had credit ratings of at least BBB-/Baa3 as of March 22 — a cutoff date that could come too late for some oil producers, such as Occidental Petroleum Corp., which had its debt cut to junk by Moody’s on March 18, with Fitch and S&P following on March 20 and March 25, respectively.

Representatives of Occidental didn’t immediately respond to a request for comment.

Republicans have argued that funding should be available to oil companies with credit ratings that slipped amid the coronavirus pandemic and a surge in crude unleashed by a Russia-Saudi Arabia battle for market share.

On Thursday, the Fed said lenders now will be able to apply their “industry-specific expertise and underwriting standards to best measure a borrower’s income.”

Highly leveraged companies also can take advantage of a new, third loan option that comes with increased risk sharing by lenders.

It wasn’t immediately clear Thursday whether the changes would allow Occidental to qualify for aid.

The Fed’s approach to tweaking the Main Street loan program avoids creating an oil industry-specific initiative that could be unpopular with the public or require approval from Congress, where Democrats are deeply opposed.

The oil industry itself has been split over government aid targeted to the sector. While some smaller, independent producers and their trade groups have clamored for government loans, the idea of industrytargeted aid has drawn resistance from larger, multinational oil companies better able to ride the rout as well as their top lobbying group, the American Petroleum Institute.

Industry opponents of targeted loans are concerned that taking taxpayer money now could cost them political capital in Washington and be used by drilling foes against the sector later.

“You can’t have capitalism on the way up and socialism on the way down,” American Petroleum Institute Senior Vice President Frank Macchiarola said. “The role of the government is to provide appropriate economic stabilization across the economy. We do not think the role of the government is to become the private economy.”