Wall Street Lenders Growing Impatient With U.S. Shale Revolution
Comment of the Day

July 21 2015

Commentary by David Fuller

Wall Street Lenders Growing Impatient With U.S. Shale Revolution

Here is the opening of this article from Bloomberg:

Halcon Resources Corp. almost ran into trouble with its banks in June 2013. And again in March 2014. And in February 2015.

Each time, the shale driller came close to violating debt limits set by its lenders, endangering a credit line that provided as much as $1.05 billion in much-needed cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells Fargo & Co., loosened their restrictions, allowing Halcon to keep borrowing.

That kind of patience may be coming to an end. Bank regulators have issued warnings on the risks involved in lending to U.S. drillers, threatening a cash crunch in an industry that’s more dependent than ever on other people’s money. Wall Street has been one of the biggest allies of the shale revolution, bankrolling thousands of wells from Texas to North Dakota. The question is how that will change with oil prices down by half since last year to $50.36 a barrel.

“Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash,” said Jimmy Vallee, a partner in the energy mergers and acquisitions practice at law firm Paul Hastings LLP in Houston.

David Fuller's view

The benefits of lower oil prices, while significant, are spread thinly throughout economies.  In contrast, the problems for producers of oil and gas at lower prices are considerable and therefore highly visible.  This can have a knock-on negative effect, affecting banks with loans to the energy sector, the number of people employed in the oil and gas industries, tax revenues from these sectors, and economic slumps in previously booming oil towns.  

There is a graph worth seeing in the Bloomberg article above.  It shows that shale companies have been able to raise some cash in the capital markets.  However, their debt levels are increasing more rapidly, at a time when oil prices (WTI weekly & daily) are falling towards the lower side of their range. 

The price decline is partly in anticipation of increased production from Iran, although this is unlikely to occur before next year, assuming the Vienna agreement on lifting sanctions in exchange for a curtailment of nuclear programmes is approved. 

Meanwhile, primarily oil exporting countries from Saudi Arabia to Russia are producing all they can in an effort to offset some of their revenue loss and also maintain supply contracts with the biggest oil importing countries, led by China.  The USA is also maintaining significant oil production but this is unsustainable at today’s prices without some government assistance on loans.  This would appear unlikely so some of the shale producers are likely to fail because there are limits to productivity increases.    

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