U.S. oil and gas companies borrowed heavily at the start of America’s energy boom, and now they're struggling with the debt. Oil prices were around $100 a barrel in 2008, and advanced drilling techniques were making it easier than ever to tap new reserves. Taking out billions of dollars in loans to boost production seemed like a safe bet at the time. And then, crude prices collapsed in 2014.
Now, U.S. banks say they expect more delinquencies and charge-offs from energy companies throughout 2015. With oil prices expected to stay around $60 to $70 a barrel this year, lenders are preemptively cutting credit lines to oil and gas firms and requiring more collateral to protect against a surge of defaults, according to a Federal Reserve survey cited by the Wall Street Journal this week.
Banks “indicated that their exposures were small, and that they were undertaking a number of actions to mitigate the risk of loan losses,” senior loan officers at commercial banks told the Fed in a report on loan terms and standards for the first quarter of 2015.
U.S. oil prices plunged by more than half in recent months, dropping from above $105 a barrel last summer to below $45 a barrel earlier this year. On Tuesday, U.S. crude futures rose above $60 a barrel for the first time since Dec. 11, 2014.
The lower prices are putting increasing strain on the oil patch, where energy companies have boosted their borrowings by 55 percent since 2010, to almost $200 billion, WSJ reported in January. That month, WHB Energy LP, a private company that drills in Texas, filed for bankruptcy protection after a lender refused to advance more money. Quicksilver Resources Inc., a Texas oil-and-gas exploration company, as well as BPZ Resources and Dune Energy Inc., all sought bankruptcy protection in March.
Cheaper oil has also sparked a wave of layoffs among oil and gas companies. In January, oilfield services giant Baker Hughes Inc. said it would lay off 7,000 employees, or 11 percent of its workforce, while its competitor Schlumberger let go 9,000 workers. Globally, energy job cuts have risen well above 100,000 positions as companies scale back development in Scotland, Australia and Brazil, among other countries, Swift Worldwide Resources, a global staffing firm, said in February.
In the latest Fed survey, banks making loans to energy companies said the firms accounted for less than 10 percent of outstanding commercial and industrial loans. Even so, the financial sector is still bracing itself for a sector-wide fallout and taking steps such as “restructuring outstanding loans, reducing the size of existing credit lines, requiring additional collateral, tightening underwriting policies on new loans or lines of credit, and enforcing material adverse change clauses or other covenants,” the Fed survey said.