Wall Street banks’ growing optimism about the energy industry is the latest boost for U.S. oil and natural gas producers already enjoying higher prices.
JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. said on Thursday in their first-quarter earnings results that rising oil prices have helped them free a combined $370 million they previously set aside to cover bad loans.
If the optimism turns into an increase in lending, it would be a boon to shale firms from Texas to North Dakota that rely on borrowed money to finance their drilling and fracking. That could further accelerate U.S. oil production, which is already expected to rise above 10 million barrels a day for the first time in late 2018, and put more pressure on OPEC’s efforts to restrain supply.
“Cautious optimism is the theme,” said Kraig Grahmann, a partner at Dallas-based law firm Haynes & Boone LLP. “Banks will still be a lot more prudent and conservative than they were when the price drop happened.”
The spigots are starting to open. Leveraged loans to the energy sector have jumped this year compared with the same period a year ago. In the first quarter, U.S. energy companies raised $26.8 billion in so-called leveraged loans — loans that are extended to those already holding significant amounts of debt — up roughly 86% from the same period last year, according to data compiled by Bloomberg.
Companies are already looking to spend more. According to a Haynes & Boone April 4 survey that questioned 163 executives at oil companies, banks and private equity firms involved in the energy sector, 76 percent of respondents said they expect credit lines to stay steady or grow, and 89 percent predicted U.S. shale drillers will spend more in 2017.
“With low cost of capital loans, there will be more programs for oil producers that will get them the desired rate of return,” Grahmann said. “Companies will be able to drill more oil and gas wells, which will increase production and thus increase U.S. supply.”
Last year, U.S. lenders reduced credit to the U.S. energy sector after crude dropped near $26 a barrel, sparking fear that indebted shale producers would default. With prices double that level now, the worries about bad loans have eased.
JPMorgan said it released $93 million of money it had previously set aside, primarily driven by improvement in oil and gas, compared with a $713 million increase in reserves the same quarter a year ago.
Wells Fargo cut back its bad-loan provisions as well.
“Improvement in the oil and gas portfolio, as well as continued improvement in residential real estate, drove a $200 million reserve release in the quarter” Mike Loughlin, Wells Fargo Chief Risk Officer, said in the report.
Citigroup said it released $77 million in reserves in the first quarter, compared with the $233 million build in reserves a year earlier, which was driven by energy-related exposure.
“If oil stays where it is for the next 12 months, there is not a big concern for credit quality,” Spencer Cutter, U.S. Credit Bloomberg Intelligence Analyst, said by telephone.
Despite all the improvement in the energy markets, banks will still be cautious in lending to oil companies, according to Cutter. “Big banks will be more selective when choosing who to extend loans and will increase lending to better producers,” he said.