Depleted Credit Lines Might Leave Banks Holding the Oil Wells

A bloomberg analyst broached this discussion today. She was a little naive in thinking the silly little bankers, who’ve been bending everyone and everything over a barrel for the past 17,000 years, were just going to cede to the oil companies and give them all sorts of money–that would be flushed directly down and into a toilet bowl.

That’s not exactly how it works.

The credit lines are tied to the value of the property. If the properties are some backwards wells in the Bakken and they depreciate: banks will decrease the line of credit. Right now, as is the case with CHK cutting their divvy payments for their preferred stock–saving $170 mill in the process to be earmarked for buying back distressed debt–energy companies are deciding whether to draw down credit lines to buy back debt –trading at bankruptcy prices–or draw it down to extend their lives.

In other words, do you buy back the debt and hope for higher crude, or keep cash in the bank and wait it out–perhaps missing an opportunity to retire debt at 50 cents on the dollar?

She seems to think the banks are morons, beholden to collateral values when crude was $100. If oil companies draw down their lines of credit and go bust, banks have first claim to assets and will own the wells–just like they owned the houses in 2008.

Is that a good thing for banks? Probably not. But they’ll make it through the other side.