Houston Chronicle – Banks are selling off loans and cutting credit lines to oil and gas companies to reduce their risk of defaults after the coronavirus pandemic wreaked havoc on the energy industry.
Hancock Whitney, a regional bank with six branches in Houston, recently said it will sell $497 million in energy loans to Los Angeles-based Oaktree Capital Management in a deal that the bank said will “significantly de-risk our balance sheet.” The bank said it will receive $257.5 million in proceeds from the sale and take a pre-tax loss of about $160.1 million on the sale.
“The primary objective of this sale is to continue de-risking our loan portfolio by accelerating the disposition of assets that have been impacted by ongoing issues within the energy industry, and have now been further complicated by COVID-19,” CEO John M. Hairston said in a statement. “While operating from a solid capital base, we decided to be opportunistic and sell these assets today, significantly de-risking our balance sheet.”
U.S. oil and gas companies, which have increasingly relied on banks to fund operations and new drilling, are finding it difficult to attract capital investment after years of lagging financial performance, accelerated by the recent oil bust caused by the global pandemic. Banks and Wall Street investors are pulling back from the energy industry as the value of oil and gas assets used as collateral for loans and credit has fallen with the price of oil.
“Capital markets have soured on U.S. oil and gas investments starting in late 2018,” said Lee Maginniss, managing director of Alvarez & Marsal’s corporate improvement energy practice. “The distress that we’re in right now has made access to capital restrictive and limited. Recapitalization is very difficult.”
The result has left energy companies without a lifeline as they struggle to weather the downturn in crude prices, slashing budgets, and halting production.
Several companies, including Antero Resources Corp., Centennial Resource Development, and Oasis Petroleum, have seen their credit lines slashed in recent months. Other companies are unable to secure capital as investors flee from the sector.
During the last oil bust in 2014-16, banks largely worked with energy companies to restructure their debt and continued to invest in the industry. After the coronavirus-driven oil crash — the second downturn in six years for the industry — there’s little appetite to help companies weather the storm, Maginniss said.
Alvarez & Marsal, one of the biggest restructuring firms in the energy sector, expects bankruptcies and consolidations to rise as companies struggle to survive the downturn.
Bruin E&P Partners last week filed for Chapter 11 bankruptcy after its lenders reduced the company’s credit line by 44 percent to $400 million, down from $710 million, causing the company to be overdrawn by more than $170 million. The cash-strapped Houston oil and gas company tried to negotiate with its major creditors to resolve their cash crunch but said it was unable to come to an agreement given the market downturn.
“The recent extreme and sudden downturn fundamentally changed the economic landscape surrounding the Debtors’ out-of-court deleveraging options and strategic alternatives that might have otherwise been available had the world not been in the midst of a global pandemic,” CEO Matthew Steele said in a court filing Friday.
Hancock Whitney, a Mississippi-based bank active along the Gulf Coast, said it has reduced its energy loan holdings to $352 million as of June 30, down from $940 million on March 31. Energy loans represent 1.7 percent of the bank’s total loans, down from 4.4 percent four months ago.
Nationally, U.S. banks hold about $650 billion in loans to energy companies, or about 3.5 percent of total bank assets, according to JPMorgan Chase.