What Middle East turmoil could mean for U.S. energy lenders

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The disruption to energy markets caused by the strike on Saudi Arabia’s oil installations earlier this month could wind up helping U.S. banks recoup some of their losses from the 2016 energy downturn.

Industry analysts say that the spike in oil prices, even if it’s short term, should improve energy firms’ cash flow and help those firms that had fallen behind on loans earlier this decade catch up on their payments.

That could be good news for some lenders in Louisiana, Texas and other energy-producing states that are sitting on piles of past-due loans. At LegacyTexas Financial in Plano and Hancock Whitney in New Orleans, at least a quarter of energy loans are classified as criticized and in danger of defaulting, according to Raymond James.

“While this is admittedly a short-term phenomenon, and only a near-term patch for any structural issues at higher-risk bank clients, it does provide more cash flow to service debts and additional time to improve operations,” Raymond James researchers wrote in a Sept. 16 report after the attacks in Saudi Arabia. “We note it could also result in higher recoveries and lower realized losses on recently charged-off loans.”

What’s less clear is what impact the events in the Middle East could mean for future energy production and, in turn, loan demand.

The price of WTI crude oil spiked by 14% in the days following the Sept. 14 attack, to $62.90, amid reports that Saudi Arabia’s oil production could be cut in half. The price of oil has fallen some since after the United States pledged to release some oil reserves in an effort to balance the market, but at midday Monday was still up 6% since the attack.

If worldwide supplies are constrained, U.S. energy firms could be encouraged to ramp up their drilling and they’ll likely turn to banks to fund their activities, some industry observers say.

Following the downturn, most of the capital for oil and gas exploration came from private equity investors as many banks retreated from lending. But as prices have rebounded — the WTI crude price is up 28% this year — banks have picked up more of the slack.

Oil and gas producers anticipate 21% of the capital needed in 2019 would be sourced as debt from banks, compared to 14% directly from private equity firms, according to law firm Haynes and Boone.

Three years ago, 38% of capital was coming from private equity compared to 14% from traditional banks, according to a past Haynes and Boone survey.

“The higher energy prices are good for the energy lenders. It’s good for future loan growth. It’s good for energy credit quality,” said Brady Gailey, an analyst at Keefe, Bruyette & Woods. “Take away the drama from that weekend, it’s still a pretty healthy place to lend.”

BOK Financial in Tulsa, Okla., has seen steady growth in its energy loan book this year and Coy Gallatin, its executive director of energy banking, said he expects the growth to continue for the foreseeable future.

BOK’s majority shareholder and chairman, George Kaiser, came from the oil business, and the company is taking a “long game” approach to funding energy production, Gallatin said.

Still, other lenders, such as Amegy Bank in Houston, are less bullish about the energy sector and are holding the line on lending.

“We’re going to remain where we are,” said Scott Collins, manager of Amegy’s Texas energy banking team. Collins pointed out that oil futures indicate prices could slip back some after the end of the year, highlighting how short-lived the price gains following the Saudi strike might be. Amegy is owned by the $70 billion-asset Zions Bancorp. in Salt Lake City.

Indeed, some investment analysts are telling clients not to get their hopes up about oil prices rising much higher. Wells Fargo analysts said in a Sept. 20 note to clients that they expected oil prices to hover around $55 a barrel for the year.

“To increase our 2019 oil targets, we will need to see continued Saudi supply disruptions, intensified military confrontation in the region, or a separate major oil supply disruption,” the analysts wrote.

Albert Conley, an industry consultant who advises lenders on oil and gas deals, said many banks are still spooked by memories of the 2016 downturn, when oil prices bottomed out at $34 a barrel, and are wary of any price volatility being caused by events in the Middle East.

“I don’t see [energy lenders] being overly aggressive,” said Conley, a senior managing director at FTI Consulting in Washington.

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