January 11, 2015

As Oil Prices Fall, Banks Serving The Energy Industry Brace For A Jolt

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January 11, 2015 | The New York Times | Michael Corkery and Peter Eavis

As oil prices continue to hover in the sub-$50 range after their precipitous drop of the past six months, most stories have been focusing on how it’s all 1) good for consumers and 2) bad for oil companies. This story from the New York Times adds a new question to the conversation: What does the oil price slide mean for banks?

Authors Corkery and Eavis offer the answer:

“While it may take some time for the crunch in the oil industry to translate into losses, one thing already seems clear: The energy banking boom is over.”

The story describes how investing in the oil and gas industry has been a boon for banks just finally emerging from the throes of recession. Producers operating in the country’s booming shale plays like the Bakken have been needing the help of banks to raise equity and to lend billions in order to finance the expensive drilling projects there.

However, as the article points out, many loans were given with the oil companies’ reserves as collateral–reserves estimated at $80/barrel.

If company defaults become common with persisting low oil prices, that does not bode well for the banks.

We here at Inside Energy have been taking our own look at oil and gas financing: