Why energy lenders say they’re ready for this oil slump

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By Jon Prior and Laura Alix

It's deja vu all over again for energy lenders, which are back on the defensive about their exposure to volatility in oil prices about five years after the last big jolt to the oil and gas industry.

Their message is clear: We are more prepared for a prolonged oil slump than the last time. However, investor skepticism will be hard to overcome.

Shares of banks with significant exposure to the energy sector recovered slightly Tuesday after being walloped on Monday, one of the worst days ever for the overall markets as worries about the coronavirus outbreak intensified and oil prices took their largest single-day fall since the Gulf War of 1991.

Comerica CEO Curt Farmer said Tuesday at an industry conference hosted by RBC Capital Markets that the $73 billion-asset company expects to see some “borrower-base deficiencies if [oil] prices remain at these extremely low levels” but stressed that the bank was prepared to “navigate the coronavirus and the associated economic slowdown.”

“In general, our [exploration and production] customers are well capitalized, have less leverage than they did during the last energy downturn and were hedging to varying degrees,” Farmer said. “The ultimate outcome will depend on the duration of the cycle.”

Comerica’s stock fell nearly 20% Monday to $35.99, and bounced up more than 11% in Tuesday’s trading to $40.24. BOK Financial in Tulsa, Okla., saw its stock price fall more than 25% Monday to $48.50, but it increased 6% on Tuesday to $51.46.

In Houston, Cadence Bancorp’s stock price fell by nearly a third, to $8.19 a share, on Monday and recovered by more than 16% in Tuesday’s trading to $9.73. Stocks of Crossfirst Bankshares in Leawood, Kan., fell 18% to $9.83 a share Monday and dropped more than 4% to $9.41 on Tuesday.

If energy prices do not eventually recover, the fear is that smaller producers and the companies that provide services to them in the fields could struggle to repay their debts, leading to sizable credit losses at banks that specialize in lending to the energy sector.

After the largest single-day decline in decades on Monday, the price of West Texas Intermediate crude had fallen by 45% since cresting at $60 per barrel at the start of the year, though prices picked back up Tuesday to a little more than $34 per barrel.

By comparison, WTI crude fell from more than $105 per barrel in June 2014 to less than $48 by January 2015. A total of 114 oil and gas producers filed for bankruptcy in the two years that followed, taking $74.2 billion in both secured and unsecured debt with them, according to data from the law firm Haynes and Boone.

The latest energy market plunge was caused by escalating tensions between Russia and Saudi Arabia, which have failed to reach an expected deal that would cut production and buoy prices. Their ensuing price war was stirred into a grim combination for energy banks that already included renewed recession fears and the Federal Reserve’s interest rate cuts among their challenges.

Lessons learned from the energy market’s collapse in 2015 will be put to the test as a “staggering” $86 billion in debt from oil and gas producers is scheduled to mature in the next four years, Moody’s Investors Service said in a Feb. 19 research note.

Most energy-heavy banks have reduced their exposure to the sector. Comerica, for instance, cut its energy loans by 37% from $3.6 billion in 2014 to $2.2 billion last year, according to its presentation Tuesday.

“The banks are entering this environment with better capital and less credit issues than in the past,” said Christopher Marinac, an analyst at Janney Montgomery Scott. “I still think the ability of the industry to stomach this gut punch is really quite good.”

Lauren Harrell, the head of commodities for the financial institutions group at advisory firm Chatham Financial, said that after the last energy downturn, many energy lenders required borrowers to hedge against the possibility that oil prices could fall, often by buying certain derivatives.

Still, Harrell suggested that many energy lenders were unprepared for the magnitude of Monday’s shock.

Lenders "have prepared for lower prices, but the move today has been more severe than anyone expected,” Harrell said.

The White House is considering a bailout for oil and gas companies as the industry has turned to the Trump administration for help with the market's tumble, the Washington Post reported Tuesday.

For the time being, most energy lenders are striking a cautious yet reassuring tone.

At the RBC conference, Regions Financial President and CEO John Turner assured investors that the $126 billion-asset company is better insulated against shocks to the oil market than it was during the last downturn and has less exposure to the oilfield services sector. Traditionally, companies that provided services to the oil fields have been a bigger risk than the drillers themselves.

“Over the last several years, we've been de-risking our portfolio. We've been remixing our business. We've been building a balance sheet that will be more consistently performing, more resilient, more sustainable. We don't have any significant concentrations in asset classes,” Turner said. “We're managing it carefully as we are ... in preparation for a time like this when there would be some volatility in the market.”

Oilfield services businesses made up nearly half of Comerica’s losses in its energy book during the last downturn from 2015 to 2017, the Dallas company’s chief credit officer, Pete Guilfoile, said at the RBC conference Tuesday.

“We’re effectively out of the energy services business,” Guilfoile said.

Don Kimble, chief financial officer of the $144.9 billion-asset KeyCorp in Cleveland, said at the RBC conference executives are keeping a close eye on their energy loans, which make up about 3% of the company’s portfolio.

“During the last downturn, our portfolio held up pretty well,” Kimble said, adding that Key expects it to do so again this year.

A spokesman for Cullen/Frost Bankers in San Antonio said it is “too early to say” what impact the recent shock would have on the $33 billion-asset company. Still, he noted that energy is now a smaller percentage of its overall loan book than it was a few years ago, representing about 11% of total loans at the end of 2019 compared with 16% in 2015.

In an investor presentation filed Tuesday with the Securities and Exchange Commission, Cadence included a snapshot of its energy lending portfolio. While the $17.9 billion-asset Cadence’s energy lending book has grown in that time period, energy loans now make up about 11% of total loans, as opposed to 18% in 2014, the company said.

Further aiding its stock bounce-back, Cadence disclosed in a separate regulatory filing Tuesday that it terminated a $4 billion notional interest rate collar on Friday, realizing a $261 million transaction gain. The gain, which had increased by 103% since Dec. 31, will amortize and boost Cadence's quarterly interest income over the next four years.

Steven Nell, chief financial officer of the $42.1 billion-asset BOK, said in an SEC filing Tuesday that 18% of its loans, or about $4 billion, were tied up in energy. That is down from 20% at the end of 2014, when the company had about $2.8 billion in loans out to the industry, according to past financial filings.

Nell stressed in the SEC filing that the duration of the downturn would have more of an impact than the short-term steepness of it. The market collapse five years ago was long. A key difference now is that oil and gas companies have less access to capital, but if prices bounce back up within the next three months, losses should be curbed, Nell said.

“We would expect that if the coronavirus epidemic fades and Saudi/Russia dispute settles, oil prices will return to the levels seen late last year,” Nell said in the filing. “Prices at that time were not exceptionally high and our portfolio was performing at an acceptable level.”

Oil wells that are drilled but have not yet started producing are a closely watched part of the energy business. About 80% of these projects would continue to profit if WTI crude stays above $25 per barrel, according to a research note Monday from Rystad Energy, which tracks the market.

Artem Abramov, head of shale research of Rystad Energy, warned in the note that it was entirely possible prices may still fall this low.

“This could turn out to be one of the greatest shocks ever faced by the oil industry, as coronavirus containment measures will add to the headache of producers fighting for market share,” Abramov said.

Paul Davis contributed to this article.

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