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U.S. Banks Growing Hesitant To Loan Money To Energy Firms

By on 22 Feb 2016 in news, notable posts

(oilprice.com) BNP Paribas, France’s largest bank, announced that it would no longer lend money to struggling oil and gas companies in the United States. “Given the current environment in the oil and gas markets and the short to medium term outlook, BNP Paribas has decided to halt the redevelopment of its reserve-based lending business,” BNP said in a statement. The bank will continue to work with its existing borrowers, but won’t lend to new ones.

The French bank was concerned that default rates among energy companies would rise, sources told Reuters. It was the second time that the bank pulled out of lending to energy companies in the U.S. – it sold a unit to Wells Fargo in 2012 before reentering the space in 2014 when oil prices shot into triple-digit territory.

It isn’t that BNP Paribas was a large lender to shale companies – it wasn’t. But the move illustrates the increasingly grisly landscape in the energy sector for borrowers and lenders alike.

The Wall Street Journal reported that three oil and gas drillers maxed out their credit lines in recent weeks. Midstates Petroleum Co., Linn Energy LLC and SandRidge Energy Inc., collectively tapped $1.5 billion in new borrowing, the full extent of their credit lines. Maxing out a credit line is a worrying sign that a driller has now exhausted all of its options, and as the WSJ puts it, the company could be “building up its cash reserves ahead of a bankruptcy filing or that it is worried lenders may at some point cut off access to credit.”

The prospect of default, in turn, could end up burning a lot of banks. “Lenders are concerned that as prices fall and liquidity is burned by operations and interest payments, at one point do the revolvers, in fact, become impaired?” Damian Schaible, a partner at Davis Polk & Wardwell LLP, told the WSJ.

For now, large banks are not concerned because energy represents a small share of their whole loan portfolio. Wells Fargo says the energy industry only represents about 2 percent of its loans. Still, Wells Fargo, JP Morgan Chase, and Citigroup are […]

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