The largest banking lenders to the oil and gas sector are becoming more cautious, marking down their expectations for oil and gas prices that underpin loans in a move expected to put further financial stress on struggling producers, industry and banking sources said, Reuters reports.
Small oil-and-gas companies get cold shoulder from large banks
STEPANAKERT, OCTOBER 28, ARTSAKHPRESS: Major banks including JPMorgan Chase (JPM.N), Wells Fargo (WFC.N), and Royal Bank of Canada (RY.TO) have, as part of regular biannual reviews, cut their estimated values for oil-and-gas companies’ reserves, which serve as the basis for those companies to receive reserve-based loans (RBLs), according to more than a dozen sources familiar with the activity.
While the size of the RBL market is unclear, it is estimated that a few hundred companies take such loans, with the cumulative size in the billions of dollars.
Those lenders have marked down the perceived value for both oil and natural gas for the coming five years, with the changes kicking in as early as this month.
Expected natural gas prices have been cut by around $0.50 per million British thermal units, about 20% below levels set in the spring. Industry sources are forecasting some firms face a 15% to 30% reduction in loan size as a result. Oil prices are expected to be about $1 to $2 lower than spring estimates.
“Some banks believe they have too much energy exposure and want to reduce some of this risk,” said Ian Rainbolt, vice president of finance at Warwick Energy, a private equity firm with upstream investments in Oklahoma and Texas.
That is a threat to smaller companies, which are already struggling to find other methods of financing - such as issuing stock or bonds - as investors grow restless with years of poor returns in the shale sector even as the United States has risen to become the world’s largest oil and gas producer.
Reduced funding could slow growth in U.S. oil and gas production, and also threaten more bankruptcies in the sector. Bankruptcy filings among U.S. oil and gas producers are at levels not seen since 2016, when U.S. crude slumped to $26 per barrel, according to law firm Haynes and Boone.
Companies heavily focused on natural gas drilling may be the most threatened. Banks are forecasting natural gas prices between $2 and $2.35 per million British thermal units for the next 12 months, and up to $2.50 at the end of the five-year term, all lower than in the spring.