Day of Reckoning Nearing for the Banks’ Oil Debt

With all grades of oil now down into the $45 range and credit disappearing in the energy sector of the U.S. economy, the New York Times led its business section yesterday with “As Oil Prices Fall, Banks Serving the Energy Industry in for a Jolt.”  The Times reported that the big Wall Street banks have lost their revenue from oil/gas debt, and that the banks with the biggest exposure to this debt are Wells Fargo (15% of all its investment banking revenue last year), with Citigroup at 12%, and the much-more-exposed big Canadian banks, led by Scotiabank at 35%.

The paper further pointed out that Wall Street firms that financed energy deals now have trouble offloading the debts. 2014 was a frothy return to record levels of mergers and acquisitions — $3.4 trillion “worth,” more than in 2007 — and energy mergers were the biggest chunk of that at $409 billion. But merger waves need following price increases (plus austerity) to handle the huge resulting debt; this wave is getting the opposite.

• OilPrice.com reported Jan. 7 that there will be a $1.6 trillion loss of earnings of oil companies in 2015 if the price stays around $50, and “without a swift rise in oil prices, a wave of write-downs and impairment charges is about to wash over the industry.”

• Moody’s announced Jan. 7 it is preparing to downgrade debt of TransOcean to junk. This is the largest builder/operator of offshore oil rigs in the world, with debt of $9.1 billion.

• Canadian oil sands producer Laracina Ltd. defaulted on $127 million in debt. Texas oil driller WBH Energy LP declared bankruptcy, its lender had cut off credit, debts about $50 million. Three other publicly traded oil firms went bankrupt in October-November.

• CreditSights Inc. said Jan. 7 that 25 U.S. shale firms are in near-term danger of defaulting on leveraged debt. This is the $200 billion loans part of the $500 billion shale debt bubble, to which rollover credit has essentially disappeared.

• Junk bond interest rates in the energy sector, 4% about investment-grade last July, are now 11% above — there is no credit. For the overall “high-yield,” $2.2 trillion bubble, interest rates were 2.5% above investment grade; they are 4.75% above now, so the oil/gas “contagion” is spreading.

• Capital expenditure is falling fast. Among 40 publicly traded U.S. exploration and production (E&P) companies in oil/gas, the average cut in capital expenditure for 2015 has been 31% from 2014. Overall, energy is one-third of all capital expenditures, so this means a total cut by at least 10% from 2014 to 2015 for the whole economy.