Fitch: Banks which benefited from shale boom now face risks as oil prices slide

Bank
Source: DollarPhotoClub

Several US regional banks lifted by shale booms will face a higher potential for credit pressures in energy-related loans, should the recent slide in oil prices persist into 2015, says Fitch Ratings.

US banks with higher concentrations of loans directly related to energy production, as represented by energy loans as a percentage of the bank’s total outstanding loans, as of the end of third-quarter 2014, include BOK Financial Corp., at 19%; Cullen/Frost Bankers, Inc., 15%; Hancock Holding Company, 13%; Comerica Bank, 7%; and Amergy Bank of Texas (a subsidiary of Zions Bancorp), estimated to be about 6%. Each of the banks held between $1.6 billion to $3.4 billion in loans to energy producers, as of Sept. 30.

Sustained pressure on oil prices could not only affect certain O&G loans, but also general consumer and commercial loans to consumers and businesses operating in energy-dependent regions.

Precise energy price levels, and the length of time at certain price levels, are among the key determinants of loan risk. Each liquids-rich shale basin, such as the Bakken in the Dakotas region, Permian and Eagle Ford in Texas and the Anadarko Basin in Oklahoma, has different hydrocarbon mixes and different economics. Within each shale play, in turn, price break-even points for each obligor — points below which investment dollars begin to be lost — can vary substantially, based on a number of factors.

For a few producers, the current $67 per barrel of West Texas Intermediate crude oil could already represent a market condition that is below break-even. If oil recovers back above $70 per barrel within the next quarter or two, it becomes unlikely that oil’s price fall will have a serious credit impact on these banks’ energy loan portfolios.

Oil prices below $50 a barrel, however, depending on how sustained, would likely trigger a jump in energy loan losses and could impact 2015’s earnings for the energy concentrated lenders. As a reference point, BOK Financial noted in its third-quarter 2014 earnings that the drop oil prices during late 2008 and first-half 2009, when prices dipped to under $50 per barrel for about six months, led to just a 47 bps of loan losses on its energy book for 2009.

Loans for exploration and production (E&P) typically are revolving credit facilities that have several features that are important to potentially protecting banks over any energy price drop.

First, these loans tend to be secured by borrowing bases that are valued on a semi-annual basis – normally in the fall and spring, although some lenders retain rights for interim (or wildcard) redeterminations. While price/barrel of crude oil affects borrowing base levels, the historical relationship is not 1-to-1. Banks tend to be easier on permissible levels for borrowing bases for E&P producers when prices decline, based on Fitch’s analysis. This was particularly true of the oil price drop of 2008 through 2009, when borrowing-base amounts fell by a significantly smaller degree than the decline in oil prices.

Fitch analysis also reveals that the availability levels for 15 E&P companies averaged 63%, as of the end of third-quarter 2014, signaling, at least as of Sept. 30, some cushion on borrowing needs.

A second potential protection for banks is that a fair number of E&P companies have hedged the cash flows they receive for production. In Fitch’s analysis on energy-related borrowing bases, the arithmetic average of hedge volume in place on 2015’s prices, as a fraction of third-quarter 2014 production for 15 E&P producers was 61%. Hedging cost rises materially the further out the hedge, thus hedge coverage for 2016 would be expected to be materially lower as of today.

A final factor in gauging bank risk is cost position, which refers to not only an E&P company’s ability to produce at lower prices, but how capable its assets are in generating additional liquidity through a pledge of non-encumbered assets, or possibly an outright sale.

More information can be found in the report, “E&P Borrowing Base Redeterminations (History Suggests Lenders May Go Easy in a Downturn),” available at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Article continues below this message

Have your opinion heard with Shale Gas International

We accept interesting, well-written opinion and analysis articles of up to 1,500 words, that offer unique insights into the shale industry. The articles cannot be overtly promotional in nature and need to fit into at least one of our content categories.

If accepted, the article must be exclusive to Shale Gas International website and cannot appear on any other websites, publications, etc. Each article may contain up to three links to external websites relevant to the content discussed in the piece.

If you would like to contribute to Shale Gas International website, please contact us at: editor[at]mw-ep.com