Banks Step Up Oil Sector Loan Reviews as Regulators See RiskDawn Kopecki
U.S. banks are stepping up the frequency of credit reviews for oil producers as regulators flag the “emerging risk” from the precipitous decline in the commodity’s price over the past year.
Lending to oil and natural gas producers poses a bigger threat to U.S. banks than most other industrial sectors, said Bill Haas, deputy comptroller for midsize bank supervision at the Office of the Comptroller of the Currency, which regulates 1,620 national banks and thrifts. The OCC’s National Risk Committee in April put oil and gas lending near the top of its list of threats that warrant closer scrutiny, given the unpredictable swings in oil prices, he said.
In response, bankers have reduced credit lines and are updating internal pricing models used to value oil and gas reserves more often than the usual twice a year, Matthew White, associate deputy comptroller, said in an interview. “We’ve heard of institutions doing that monthly or weekly in the height of the decline to make sure they stay on top of the emerging risk,” he said.
That’s making it harder to access capital as more drillers fight to stay afloat amid persistent low oil prices. Among the 28 U.S. companies that defaulted on their debt through May this year, 11 were energy firms with $3.5 billion in outstanding obligations, according to Fitch Ratings Ltd. As a group, the sector’s credit ratings have taken a nosedive in recent months, falling at a faster rate than other industries.
Bank examiners started noticing some oil and gas companies running into problems staying current on their loan payments this quarter.
“We are beginning to see some deterioration in the credit quality of oil and gas loans to borrowers that used high volumes of debt to finance their growth over the past several years,” Grant Wilson, director of commercial credit for the OCC, said in an interview. That’s begun showing up in data reports from large banks as an increased probability of more troubled loans on their books, he said.
The OCC developed its first guide on oil and gas lending last year following 30 percent and 22 percent surges in loans to the sector in 2012 and 2013, respectively. The manual is highly technical and outlines concerns specific to the industry, including accounting rules for oil reserves, how to review engineering reports, environmental issues such as potential oil spills and other risks.
One red flag for lenders is that the volume of energy debt rated CCC or below -- the weakest ratings among junk bond issuers -- has more than doubled to $62 billion from a year ago, Fitch said in a June 12 report. That’s almost triple the amount of CCC ratings for the three next-largest industries combined, the report found.
Revolving credit lines are based on the value of a company’s oil reserves, which are generally revalued and adjusted twice a year, around April and October. In between those reviews, some banks have started to reduce credit lines.
BreitBurn Energy Partners LP executives knew last year the Los Angeles-based oil producer’s $2.5 billion credit line with Wells Fargo & Co. was probably going to get cut, according to people familiar with the matter. The company had almost maxed out its revolving credit line to purchase QR Energy LP when U.S. oil was trading above $100 a barrel.
By the time the deal closed in November, prices were below $60. BreitBurn executives began searching for new funding sources and ended up raising $1 billion from private-equity firm EIG Global Energy Partners in April. That money mostly went to paying down its revolver. Wells Fargo reduced BreitBurn’s borrowing base to $1.8 billion and agreed to maintain that credit limit through April 2016 as part of that EIG deal, the people said.
Banks weren’t that hard on oil producers when they revised credit lines this spring, said Omar Samji, a partner in the energy practice at Jones Day in Houston. That’s because most drillers had derivatives in place to offset the drop in oil prices. But many of those contracts are scheduled to expire before the fall, raising the specter that October could be more difficult.
“There hasn’t been much pressure or pain inflicted by the banks in April,” Samji said in an interview. “While the banks did bring their underlying valuation for reserves down a little bit, they certainly weren’t very aggressive about it. There’s speculation now about October.”
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.