OIL VOLATILITY & WALL STREET STRATEGY

Volatility in Oil prices and a Barrel below $30 in February scared the banks that turned away from lending to energy companies. The price of crude has bounced back nearly 80% from its February low to settle around $45.00 a barrel but lenders are still wary.

Big banks cut loans to the energy sector by about 3% in the second quarter over all and some individual lenders pulled back much more, according to the Wall Street Journal.

Volatility is making bankers very nervous especially because there is increased regulatory scrutiny of energy-sector lending and exposures at banks.

At large U.S. banks including Wells Fargo & Co. and Bank of America Corp. about 40% of energy loans were considered “at risks” in the second quarter, thus forcing the Banks to hold about $6.4 billion in reserves for energy loan losses. The result is that banks are forcing medium and small companies to work with smaller credit line when the large conglomerates continue to add debt to their balance sheet to adapt to the $45 a Barrel, the new reality.

Over all, large banks cut loans to exploration and production companies about 8% in the second quarter according to the Wall Street Journal.

In the meantime, the world’s largest energy companies are back into very high debt levels as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels. Exxon, Shell, BP and Chevron hold a combined staggering net debt of $184 billion, twice their 2014 debt levels.
This debt level is a direct consequence of the toll the two-year price slump has taken on the oil industry and a result of the OPEC on-going price war lead by the Saudis.

The debt is piling up despite cuts of billions of dollars on new projects and operations. The level of investments has never been so low but everybody keeps pumping ever more oil and gas.

The companies spent more than 100% of their profits on dividends last year and it is not sustainable. It is not making any operational sense but Wall Street is calling their policy and therefore they continue. This financial strategy may trigger some long term problems for exploitation…. Record-low interest rates are helping ease the pain, but someone should realize that Operations needs to be the main component of a strategy not Wall Street. It is shortsighted and it could have bad consequences.

The oil slump is making harder for companies to raise money with asset sales to pay off debt.

Are BP, Shell, Exxon and Chevron “too big to fail, can they weather the problems for the next two years?

Some large Funds believe so but some are starting to withdraw. In the meantime, the Oil continues to settle around $45 and several respected analysts anticipate a price to settle down around $42 a barrel not really encouraging for the Majors!

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