Shale Boom Lenders Set Aside Cash to Cover Sour Energy Loans

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A worker checks the drilling rig before attaching it to the turntable on Endeavor Energy Resources LP's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, U.S., on Friday, Dec. 12, 2014.

A worker checks the drilling rig before attaching it to the turntable on Endeavor Energy Resources LP's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, U.S., on Friday, Dec. 12, 2014.

Photographer: Brittany Sowacke/Bloomberg

Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co., among the biggest lenders bankrolling the U.S. shale revolution, are setting aside more cash to cover souring energy loans.

Wells Fargo saw a $416 million increase in past-due loans, most of which was energy debt, the company said Tuesday in a presentation. JPMorgan bolstered its reserves to cover potential losses by $250 million, with $140 million set aside for oil and gas loans, the bank said during a conference call Tuesday discussing second-quarter performance. Bank of America’s at-risk commercial loans increased 7 percent because of potential energy losses, the company said in a statement Wednesday.

“With oil dropping in half to $50, we knew we were going to see some energy losses,” said Jeff Harte, an analyst at Chicago-based investment banking firm Sandler O’Neill & Partners LP. “Everybody is waiting for credit problems to accelerate in the energy industry.”

Bank lenders have been critical to the U.S. shale boom, which has seen domestic crude production rise to the highest levels in about 40 years. Most shale companies spend far more money than they make and rely on debt to keep on drilling.

Oil’s 47 percent plunge over the last year to has made it tougher for drillers to pay their debts. Oil and gas companies accounted for 17 of the 59 corporate defaults so far this year, according to a July 9 report from Standard and Poor’s. West Texas Intermediate on the New York Mercantile Exchange was down 2.5 percent at $51.70 a barrel at 12:08 p.m. East Coast time.

“The drop in energy prices did impact the cash flow and collateral values of a number of our borrowers,” John Stumpf, president and chief executive officer of Wells Fargo, said during Tuesday’s earnings call. “The deterioration in this portfolio is reflected in our allowance for credit losses and we will continue to monitor the energy portfolio.”

Additional Reserves

JPMorgan may set aside additional reserves to cover potential energy losses in the second half of the year, said Marianne Lake, the bank’s chief financial officer, during the earnings call. That doesn’t necessarily mean those loans will turn out to be losses, she said.

Wells Fargo and JPMorgan are among the lenders to shale drillers including Halcon Resources Corp., Oasis Petroleum Inc., and Pioneer Natural Resources Co., according to data compiled by Bloomberg.

“We’ve got the best team in energy banking and our credit folks working through the portfolio,” John Shrewsberry, Wells Fargo’s chief financial officer, said during the call. “So the impact here is relatively immaterial to Wells Fargo.”

(An earlier version of this story corrected the spelling of Sandler O’Neill & Partners LP.)

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