HOUSTON - Even though the energy business ain't what it used to be, it can still mean good business for banks.
Ever since the oil price roller coaster careened off its rails in 1986, production has been at a standstill. Today, the hunt for crude has gone abroad. Major oil companies have practically abandoned the domestic search, which once fueled the demand for loans at local banks.
But many experts insist that the recent downturn is only temporary, and that the demand for energy loans is about to take off again. Banks, they say, stand to benefit because they will remain the senior financial advisers to oil companies, despite fierce competition from other sources.
Need for Capital
"It's been almost a decade since any bank financing has been available for some parts of the [energy] market," said Matt Simmons, president of Simmons & Co., a Houston investment bank specializing in the energy industry. "At some point in the next few years, there's going to be a massive need for capital."
Bankers agree. Gary Wright, executive vice president at Texas Commerce Bank, a subsidiary of Chemical Banking Corp., said that energy companies of all sizes have been undergoing a wave of bank-financed consolidations that is sure to produce ripples.
"Everything has been geared toward acquisition's," he said. "That part of the cycle usually comes before production takes off."
Borrowing Needs Increase
For a small core of energy lenders, the last year has seen a marked increase, in borrowing needs ranging from multinational conglomerates in the public markets to small independents and oil service companies that are knocking on the vault door of hometown banks.
"I think there's definitely a trend of banks wanting to get back into the business," said Frank Anderson, a bank analyst at Little Rock-based Stephens Inc., who witnessed the fallout from the last downturn in oil prices. "I think the numbers, on an aggregate basis, are still not that large yet."
Mr. Anderson's views are backed up by the numbers. Energy loans make up 7% to 10% of loan portfolios among a group of bankers interviewed by American Banker. That's down sharply from levels as high as 25% just a decade ago.
Shaking the Money Loose
At Norwest Corp.'s Colorado bank, executives say that 10% of their loan activity is in oil and gas activities with commitments totaling an estimated $200 million. Like other banks, they would like to see more on the books.
"Clearly, there is a lot more capital available today than before," said Tom Foncannon, senior vice president at Norwest-Colorado. "The banks are still keeping the senior positions in many of these transactions."
Like other areas of lending, bankers have seen their energy financing business encroached on by everyone from Wall Street to several energy companies that see capital raising as a profitable long-term business for themselves. Global companies such as Exxon and Shell Oil Co. use the public markets to finance their capital needs.
But banks continue to be the adviser of choice. In its 1992 rankings, London-based Petroleum Economist, an industry publication, found that only one of the top 25 energy loan arrangers was not a bank.
Banks Lead Energy Lenders
Indeed, Chemical Banking Corp. secured the top spot with 55 deals valued at $8.2 billion, followed by other money center banks; then came the lone mega-regional, NationsBank, and a host of foreign banks.
More importantly, in a survey of energy executives, eight banks were listed ahead of any Wall Street firm for their expertise and creativity in advising borrowers.
For Chemical, the rise to No. 1 is not surprising. The bank has historically been a player in major corporate financings, and its acquisition of Manufacturers Hanover two years ago only served to further enhance its clientele.
Chemical's franchise includes once-independent Texas Commerce Bank and parts of the former First City Bank in Houston. Manny Hanny's energy lending business is largely international so it nicely complements Chemical's predominantly domestic portfolio.
Another Weeding Out?
Even though Chemical inherited some business from the First City deal, it did not hire any of the veteran energy lenders. Lead by James Kipp, that group earlier this year signed on with Charlotte, N.C.-based First Union Corp. to launch a specialty lending group.
While Mr. Kipp insists his bank is a long-term player, he said that less-than-robust growth in energy lending may push some from the area. "There may be a weeding out in the next couple of years," he said.
Ironically, the toughest competition that banks may face comes from energy companies themselves. The most striking example is the decision by Enron, a Texas-based energy company, to start a finance arm in the wake of the 1986 price collapse that froze out many oil and gas producers.
Privately, many banks cited Enron Finance Corp. as tough competition, but refused to talk on-the-record about the company's lending, noting that the parent company is a prized borrower.
A New Breed
"They are a client of ours," said one senior banker, "and it would be smart to just not say anything." Enron declines to discuss the business, other than to say they have a $1 billion portfolio of commitments they plan to increase.
What makes Enron such a tough competitor is the fact that their loans are secured by guaranteed gas production, which effectively allows the company to loan money today on future gas they can move through their own network of pipelines.
Beyond the major oil companies, there is still a limited business for lending to small independents and oil field service companies that were once the bread and butter of smaller banks across the Oil Belt. (Independents are that breed that mortgage their homes and Cadillacs to holes in the ground with the hopes of a big payoff.
The independents borrowed heavily in the early 1980s and many suffered greatly when oil prices plunged below $10 a barrel a few years later.) Amazingly, few banks lost money on those loans because they were secured by a pledge of oil reserves.
Today, independents are fewer but smarter about how they leverage. "The independents who are still in business today are keenly focused on debt reduction," said David Seat, a vice president in energy lending at Bank of Oklahoma. "Today's independent is more focused on the total picture and not just the next hole."
Observers say it is hard to measure capital demand among independent producers. They note that the buying and selling of oil and gas reserves among major companies will create new opportunities for companies further down the food chain.
At the same time, few companies are borrowing - as they did in the sky-is-the-limit 1980s - to finance exploration. "Most of the companies are doing their development work out of their cash flows," said Sam Atkins, who heads energy lending at Charlotte, N.C.-based NationsBank.
Roots of Suffering
The banks which suffered the most from energy-related chargeoffs were those with loans to oil field service companies. Those companies went bust when demand for their capital-intensive heavy equipment dried up almost overnight.
For the hard hit lenders, loans that once seemed safe were literally recouped by selling off the borrower's assets for scrap metal.
"They say that those loans were recovered for pennies on the pound," said Bill Marks, chairman and chief executive officer at Whitney National Bank, a New Orleans bank that traced some of its troubles to energy lending. "We're staying in the energy (lending) business, but we're really being thorough and understanding the risk we're taking."
For others, the history of bad loans to service companies is not a deterrent. At Southwest Bank of Texas, a $450 million-asset bank started in 1989 and run by some veteran oil and gas lenders, officials are bullish on lending to oil field service companies.
"I think that area has probably gotten a bad name, one that is worse than deserved," said Paul Murphy, executive vice president at the bank. !!!BEGIN TABLE Top 10 Providers of oil and Gas Loans to U.S. Corporates Signed in '92 Amount (Millions) NumberNationsBank $3,315 130Chemical Bank 1,989 63Chase Manhattan 1,553 53J.P. Morgan 1,200 41Bank of Nova 1,130 44
ScotiaBank of America 1,105 35Citicorp 1,091 31Bank of Montreal 914 46CIBC 819 34Credit Lyonnais 781 30
Source: Petroluem Economist
Top 10 Arrangers of Oil and Gas Loans Signed in '92 Amount (Million) NumberCheemical Bank $8,218 55J.P. Morgan 7,944 19Citicorp 5,758 38Chase Manhattan 4,149 49NationsBank 3,320 87Chevron 3,000 2Barclays Bank 2,450 15Bank of America 1,988 18National 1,809 12
WestminsterFirst National 1,735 14
Bank of Chicago Source: Petroleum Economist !!!END TABLE