More Competitive US O&G Lending Drives Down Pricing

A renewed willingness to lend to US oil and gas companies, as oil prices stabilize well above lows, is driving down pricing for borrowers after two straight years of steep increases.

 

The volume of credit lines provided to exploration and production companies, using their oil and gas reserves as collateral, so far this year has already topped full-year 2016, although it is a shadow of the 2014-2015 tallies reached before oil and gas prices tanked, according to Thomson Reuters LPC.

 

While some banks have left the industry, those remaining are chasing relatively low lending volumes, leading to pricing competition on the smaller pool of loans.

 

Loan pricing over Libor has dropped persistently since peaking in this year's first quarter.

 

After increasing for two straight years, spreads on these so-called reserve-based loans now average 194bp to 294bp over Libor, LPC data show. That’s well below recent highs of 270bp-370bp reached in the first quarter of this year, and nearer to the 180bp-280bp range in full-year 2015.

 

“There’s more capital coming back to the market,” said one industry source. “For some of these banks, including JP Morgan, Wells Fargo (WFCNO), Bank of Oklahoma and Texas Capital, oil and gas lending was one of the pillars of their business and they’re getting back to it.”

 

Texas Capital declined to comment. Bank of Oklahoma was not immediately available for comment.

 

Wells Fargo declined to comment. The bank’s third quarter earnings report showed a modest 1% growth in oil and gas loans outstanding versus the prior quarter, to US$102m.

 

“This industry has been very resilient through the cycle and we remained committed to our clients throughout, providing them with unwavering support to help them succeed,” said Mike Lister, head of JP Morgan’s Corporate Client Banking Energy group. “There is more bank capital available today for oil & gas companies.”

 

Lending to the upstream sector has reached US$35bn so far this year, surpassing the US$29bn lent in all of last year, LPC data show. However, this volume is starkly lower than the US$112bn in 2014 and US$61bn in 2015.

 

The upturn this year reflects the stabilization of oil prices at improved levels, and a shake-out of weaker credits after the plunge in oil and gas prices spurred a wave of bankruptcies in the sector.

 

Oil prices earlier on Wednesday reached their highest levels since mid-2015, Reuters reported, as global supplies pushed markets higher. US West Texas Intermediate crude settled at US$54.30 per barrel.

 

“Lessons learned from the 2015 and 2016 bankruptcies are that, although relative position of the debt instrument on the balance sheet matters, extremely low firm-wide recoveries can produce abnormal losses for even the most secured creditors, such as reserve-based loan holders, despite their substantial debt cushions,” Moody’s Investors Service wrote in a September report.

 

The subsequent energy price upturn and stability has led to better recovery rates since the second half of last year, the rating agency said.


(Reporting by Lynn Adler; Editing By Leela Parker Deo and Jon Methven)