Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15 percent to 20 percent cut in their credit lines, the head of JP Morgan’s (JPM.N) commercial bank told investors on Tuesday.
Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan’s commercial bank, said that is changing.
Moves, disclosed in securities filings, by oil and gas companies such as Linn Energy (LINE.O) and SandRidge Energy to max out revolving credit lines – designed to cover short-term funding gaps – have prompted banks to take action.
Petno said JP Morgan was not waiting for April, when banks traditionally reassess the value of oil reserves underpinning energy loans – a process known as redetermination – to reassess its exposure.
“We are not waiting for the spring redetermination to discuss this with our clients,” he said during a presentation at JP Morgan’s annual investor day in New York. Petno said JP Morgan had been working closely with its energy customers through the current price rout.
The biggest U.S. bank by assets plans to increase provisions for expected losses on bad energy loans by more than 60 percent in the first quarter.
Petno said he expected credit lines, on average, would shrink by 15 percent to 20 percent across the industry, but there would be wide variations depending on the health of the borrower.
“Some borrowing bases may by go up. Some may go down by 50 percent,” he said.
A lurch in the price of oil below $30 a barrel last month has forced companies to offload assets and cut staff to survive.
Dozens of companies have already hit the wall and a third of oil producers and service firms, or 175 companies, are at high risk of slipping into bankruptcy this year, according to a study by Deloitte.
“Most of these clients are working with their banks way in advance of redeterminations, so it is compelling M&A, it is compelling asset sales, it is compelling discussions with private equity. But there is a lot of leverage,” said Petno.
“The most distressed clients know when they are going to be pinched… and are taking the steps to deal with it,” he added. “There will be a meaningful number of these players who have no options. I think we have only begun to see the range of bankruptcies in oil and gas.”