Banks Losing Millions On Bad Energy Industry Loans
Originally published on Oil Price.
By Nick Cunningham
Oil companies continue to get burned by low oil prices, but the pain is bleeding over into the financial industry. Major banks are suffering huge losses from both directly backing some struggling oil companies, but also from buying high-yield debt that is now going sour.
The Wall Street Journal reported that tens of millions of dollars have gone up in smoke on loans made to the energy industry by Citigroup, Goldman Sachs, and UBS. Loans issued to oil and gas companies have looked increasingly unappetizing, making it difficult for the banks to sell them on the market.
To make matters worse, much of the credit issued by the big banks have been tied to oil field services firms, rather than drillers themselves – companies that provide equipment, housing, well completions, trucks, and much more. These companies sprung up during the boom, but they are the first to feel the pain when drilling activity cuts back. With those firms running out of cash to pay back lenders, Wall Street is having a lot of trouble getting rid of its pile of bad loans.
Robert Cohen, a loan-portfolio manager at DoubleLine Capital, told the Wall Street Journal that he declined to purchase energy loans from Citibank. “We’ve been pretty shy about dipping back into the energy names,” he said. “We’re taking a wait-and-see attitude.”
But some big investors jumped back into the high-yield debt markets in February as it appeared that oil prices stabilized and were even rebounding. However, since March 4 when oil prices began to fall again, an estimated $7 billion in high-yield debt from distressed energy companies was wiped out, according to Bloomberg.
The high-yield debt market is being overrun by the energy industry. High-yield energy debt has swelled from just $65.6 billion in 2007 up to $201 billion today. That is a result of shaky drillers turning to debt markets more and more to stay afloat, as well as once-stable companies getting downgraded into junk territory. Yields on junk energy debt have hit 7.44 percent over government bonds, more than double the rate from June 2014.
An estimated $1 trillion in loans were provided to the energy industry over the past decade, with most of that passed off to other investors. The practice is common, but starts to fall apart when the quality of loans starts to deteriorate. Banks like Citi have been sitting on bad loans, hoping for a rebound. But with oil prices dipping once again, big banks are starting to eat the losses. Some bad loans were sold off in mid-March at 65 cents on the dollar, the Wall Street Journal reported on March 18.
Souring debt comes at a time when oil and gas firms are also issuing new equity at the fastest pace in more than a decade. Drillers are desperate for cash, and issuing new stock, while not optimal because it dilutes the value of all outstanding shares, is preferable to taking on mountains of new debt. An estimated $8 billion in new equity was issued in the first quarter of 2015 in the energy sector, the highest quarterly total in more than ten years. But, falling oil prices have caused share prices to tank, reducing the value of new shares sold, and ultimately, the amount of cash that can be raised.
Big Finance’s struggle to unload some bad energy loans will ripple right back to the energy industry. If financial institutions cannot find buyers, they will be a lot less likely to issue new credit. That means that oil and gas companies in need of new cash injections may have trouble finding willing partners. Once access to cash is cut off, the worst-off drillers could be forced into a liquidity crisis.
Reprinted with permission.
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Good news, bad news, good news less oil drilling and less FF into the environment, bad news less work for drillers and related company’s, but they always could find work in geothermal energy field, same’ tools’ and same work.
Well, almost the same tools. Classic geothermal drills larger holes with seriously larger eqipment. It is a hole in the ground, but in different formations, even different regions. A lot of people, from geologists and bankers to drillers and roughness would have to relearn some assumptions about drilling progress and risks. Nothing they couldn’t handle, but they would need some retooling and the requisite learning curve, not just directions to the next wellsite.
At the same time, take a look at Foro Energy’s website and their development of laser-and-diamond hybrid drilling, partly aimed at the geothermal market. Laser has been the drilling tech of the future for a while, but they may have figured out the very pesky details. This may speed up drilling by ten TIMES current rates. Enhanced geothermal may finally, shortly be a competitive thermal electric power source outside geyser country.
Cool, i do need to check that out.
Thanks.
If my memory is correct some of the lateral drilling and hydro fracturing technology and companies were first developed with the idea of being used for the geothermal industry. However the poor site choice and immature geologic references caused early failures that had these companies turn to the oil and gas industries in order to remain viable. Now it looks like the lessons learned over the past 50—60 years will end up being of benefit to the geothermal industry after all.
Oh the irony.
Well I guess all good things come full circle.
Yes what an irony.
“Junk energy debt”: meaning oil and gas debt. It would be nice to see a comparison of bond default rates and yields between oil and gas, coal, nuclear, wind and solar. Has a solar or wind project bond (as opposed to one issued by a manufacturer) ever gone into default?
This sort of thing has a ripple effect. The renewable bond people in the banks are competing with their fossil bond counterparts for bonuses, status, and new credit lines. They are winning. The news gets up to board level and on to the Street: renewables are safe, fossils are risky.
The American bubble economy at its best, from one financial crisis to the next after Reagan and the Bushes deregulated the financial sector. People actually learned something from the Great Depression and put rules in play that served well for well over fifty years before the neo market liberals deranged them. Dotcom crisis, lehman crisis, fracking crisis, socialising losses and the wealth gap. And not-sustainable already implies clearly in itself that it is not a good economic idea but only a short term scam. Not to start mentioning all the drinking water going to fracking in a record drought. Soooooooooooo dumb.
I do share your sentiment about your last comment!!
RE is unstoppable. FF is doomed. Any financial institution investing in the wrong field at this point is short term speculation. The scum are expecting to get a taxpayer bailout if they fail.
Another short term, useful work option for some of the oil and gas drilling services industry would be the larger scale campus wide go-exchange heat pump projects. Obama has an exec order to reduce energy use in the fed agencies, and this would keep the truck mounted service drillers employed — Ball State U in Indiana has the press lately for the biggest campus wide project right now. Some other universities have announced similar plans. Even the Oklahoma State Capitol building uses geo-exchange heat pumps (half million sqare feet of office space). Colleges, medical centers, government office complexes (the other dozen buildings around the OK State Capitol, maybe?) might make good prospects, and get oil and gas folks used to this market. There’s more than one type of energy in the ground.
Couldn’t happen to a more deserving group of greedy vultures