As I write this the lemmings over at CNBC are telling us cheap gas will fuel consumer spending, do not own $RIG {no shit Sherlock) and rearranging chairs on the Titanic.
As everyone ignores the 900 lb gorilla in the room and conducts surveys on where crude is headed (survey says!), we may be revisiting “Too big To Fail ” very soon.
Shale wells are very expensive to complete, E&P companies drill from cash on hand but need to borrow to cover the fracking cost to complete these monsters.
From our friends at Bloomberg:
North American oil and gas producers have sold $61.5 billion in equity and debt since January 2016, paying more than $700 million in fees, according to data compiled by Bloomberg. Half the money was raised to repay loans or restructure debt, the data show. “Being there for our clients in all market environments, particularly the tough ones, is something we feel very strongly about,” says Brian Marchiony, a JPMorgan spokesman. “During challenging periods, companies typically look to strengthen their balance sheets and increase liquidity, and we have helped many do just that.”
Lenders have been setting aside cash to cover potential energy losses. JPMorgan bolstered its reserves by $160 million in the third quarter. Bank of America’s at-risk loans increased 15 percent from a year ago as a result of the deteriorating finances of some of its oil and gas borrowers. Still, the oil bust has left banks relatively unscathed. Asked why lenders weren’t seeing more losses from energy defaults, BofA Chief Executive Officer Brian Moynihan said in a conference call, “A lot of that risk is distributed out to investors.”
Citigroup, Bank of America, and JPMorgan were among the banks that courted fast-growing shale drillers in the hope that an initial loan would lead to investment banking business. Citigroup’s energy portfolio, including loans and unfunded commitments, swelled to $59.7 billion as of June 30, Bank of America’s to $47.3 billion, and JPMorgan’s to $43.6 billion, according to company filings. “They loan money at cheap rates, and the banks get the fees from the bond and share sales,” says Jason Wangler, an analyst with Wunderlich Securities. “When things are going well, it’s mutually beneficial. Now it’s a different conversation.”
While I am not saying that we will visit the subprime debt crisis (subprime market was more than 600 billion), there have been a lot of greedy bankers out there and that shoe has yet to drop.
More to come on this story.
Beautiful weekend in DC, 65 degrees, no need for a new coat or turn on the heater.
TGIF! Enjoy the weekend.
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