May 26, 2015 - The Wall Street Journal recently reported that tens of millions of dollars have “gone up in smoke” on loans made to the energy industry by Citigroup, Goldman Sachs, and UBS. Loans issued to oil and gas companies have looked increasingly unappetizing, making it difficult for the banks to sell them on the market.
“The banks intended to sell the loans to investors but have struggled to unload them even after cutting prices, thanks to a nine-month-long plunge that has taken Nymex crude futures to their lowest level since 2009. The losses mark a setback for Wall Street, after global banks earned $31 billion in fees over the past five years by financing energy-company stock sales, borrowing and mergers-and-acquisition transactions.”
To make matters worse, much of the credit issued by the big banks have been tied to oil field services firms, rather than drillers themselves – companies that provide equipment, housing, well completions, trucks, and much more. These companies sprung up during the boom, but they are the first to feel the pain when drilling activity cuts back. With those firms running out of cash to pay back lenders, Wall Street is having a lot of trouble getting rid of its pile of bad loans.
In an article published by Oilprices.com called “Wall Street Losing Millions from Bad Energy Loans”, Nick Cunningham states that souring debt comes at a time when oil and gas firms are also issuing new equity at the fastest pace in more than a decade. Drillers are desperate for cash, and issuing new stock, while not optimal because it dilutes the value of all outstanding shares, is preferable to taking on mountains of new debt. An estimated $8 billion in new equity was issued in the first quarter of 2015 in the energy sector, the highest quarterly total in more than ten years. But, falling oil prices have caused share prices to tank, reducing the value of new shares sold, and ultimately, the amount of cash that can be raised.
Big Finance’s struggle to unload some bad energy loans will ripple right back to the energy industry. If financial institutions cannot find buyers, they will be a lot less likely to issue new credit. That means that oil and gas companies in need of new cash injections may have trouble finding willing partners. Once access to cash is cut off, the worst-off drillers could be forced into a liquidity crisis.
This squeeze is also being felt in the used equipment markets as companies and their secured lenders take underutilized and excess equipment to auction. With the supply curve subjected to such a sudden spike in equipment volume, prices are likely to drop below reasonable levels providing ample opportunity for well capitalized buyers to take advantage of the situation.