The price of oil is dropping, so banks will keep paring back their energy loan portfolios, right? As it turns out, now may be the time to jump back in.

During the depths of the energy crisis, numerous banks cut their exposure to the sector to minimize losses. Five of the biggest oil and gas lenders — BBVA Compass, BOK Financial, Comerica, Hancock Holding and Zions Bancorp. — all reduced the size of their energy books between Dec. 31, 2015, and March 31 of this year.

Oil prices strengthened earlier this year, rising as high as $54.45 per barrel on Feb. 23, but have since taken a tumble again. West Texas intermediate crude oil on Tuesday fell 2.8% to $42.98 per barrel, a 10-month low, on concerns of a supply glut.

“Oil bulls need to wake up: $100 per barrel oil will remain a pipe dream, and likely even $80 per barrel, until the world’s oil producers stop overproducing,” John LaForge, head of real asset strategy at Wells Fargo, wrote in a June 15 research report.

However, a variety of factors have some bankers, economists and analysts convinced that it may be time for energy lending to grow again. Indeed, the $73 billion-asset Comerica in Dallas said that its oil and gas lending increased in the early days of June.

“Energy prices have stabilized, and the rig count has increased,” Curtis Farmer, Comerica’s president, said on June 14 at the Morgan Stanley Financials Conference, referring to the number of oil rigs in production.

The first indicator is that oil prices may have reached a point of stability. It’s true that oil in the mid-$40’s per barrel is far removed from the $100 level in June 2014. But it’s easier to manage risk if a banker has some confidence oil won’t fall past a certain point, Jay Isaacs, president of the $1 billion-asset FirstCapital Bank of Texas in Midland, said in an interview.

“The industry as a whole would like to have that level of predictability in maintaining a solid price level,” Isaacs said.

The current price range in the $40s is more economically feasible for lenders that specialize in exploration-and-production loans — essentially mortgages secured by the mineral rights, said Jared Shaw, an analyst at Wells Fargo Securities.

“Oil … seems to have stabilized in the high-$40s, low-$50s kind of range,” Harris Simmons, chairman and CEO of the $64 billion-asset Zions, in Salt Lake City, said at a May 31 investor conference. “At that level, there is enough activity going to … continue [loan] demand.”

Cheaper oil has also created a credit environment that is more appealing for some banks, such as the $33 billion-asset BOK Financial in Tulsa, Okla., which has added $1 billion of energy loan commitments in the past 12 months, said Stacy Kymes, executive vice president of corporate banking. Key segments of the industry "are exhibiting growth characteristics that are positive for loan demand," Kymes said.

About three-quarters of BOK’s energy loans are to oil and gas producers, which means the loans are secured by oil and gas reserves. That provides BOK with some insulation from the sector’s volatility, Shaw said. “They’re seeing better pricing and better structure, and it’s less competitive than it was before,” he said.

Many banks, including the $2 billion-asset MidSouth Bancorp in Lafayette, La., have allowed problem energy loans to run off their books. And lenders like the $4 billion-asset Green Bancorp in Houston have decided to exit energy lending entirely. Both developments have created an opportunity for others to pick up new business.

The banking industry is also less likely to see deterioration in credit quality because many lenders learned their lessons during the energy crisis, said Bernard Weinstein, associate director of Southern Methodist University’s Maguire Energy Institute.

“Most bank lenders have been extremely conservative in valuing collateral since the bust three years ago,” Weinstein said.

However, some segments of energy lending are still volatile. Companies that provide services to offshore rigs, such as transporting employees by boat to and from the mainland, have a difficult time turning a profit with oil in the $40s, Shaw said.

“There is no expectation that offshore services companies will be recovering in the near term,” Shaw said.

Nor has every oil-producing region rebounded. The Permian Basin in west Texas has become viable again. But areas like the Marcellus Shale formation in Pennsylvania, which is heavily dependent on fracking, won’t be economically viable until oil prices rise, Shaw said.

Weak markets like Pennsylvania and reminders of past downturns give bankers like FirstCapital’s Isaacs pause when it comes to discussing the idea of energy lending making a comeback. Between 10% and 12% of FirstCapital’s $686 million loan book is tied to the energy industry, the same level it has been at for years, and FirstCapital has no plans to deviate from that, Isaacs said.

“It’s easy to operate in the boom times, but you really test your mettle when you go into a bust,” he said. “When there’s that kind of volatility, you’ve got to stick to your guns.”

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