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Day of Reckoning Nearing for the Banks’ Oil Debt

Jan. 12, 2015 (EIRNS)—With all grades of oil now down into the $45 range and credit disappearing in the energy sector of the U.S. economy, the New York Times led its business section today with "Banks Serving the Energy Industry in for a Jolt." The Times reported that the big Wall Street banks have lost their revenue from oil/gas debt, and that the banks with the biggest exposure to this debt are Wells Fargo (15% of all its investment banking revenue last year), with Citigroup at 12%, and the much-more-exposed big Canadian banks, led by Scotiabank at 35%.

The paper further pointed out that Wall Street firms that financed energy deals now have trouble offloading the debts. 2014 was a frothy return to record levels of mergers and acquisitions — $3.4 trillion "worth," more than in 2007—and energy mergers were the biggest chunk of that at $409 billion. But merger waves need following price increases (plus austerity) to handle the huge resulting debt; this wave is getting the opposite. "Morgan Stanley, for instance, led a group of banks that made $850 million of loans to Vine Oil and Gas, an affiliate of Blackstone, a private equity firm. Morgan Stanley is still trying to sell the debt.... Goldman Sachs and UBS led a $220 million loan last year to the private equity firm Apollo Global Management to buy Express Energy Services. That debt has not been sold. A precipitous drop in oil prices can quickly turn loans that once seemed safe and conservatively underwritten, into risky assets."

  • OilPrice.com reported Jan. 7 that there will be a $1.6 trillion loss of earnings of oil companies in 2015 if the price stays around $50, and "without a swift rise in oil prices, a wave of write-downs and impairment charges is about to wash over the industry."

  • Moody’s announced Jan. 7 it is preparing to downgrade debt of TransOcean to junk. This is the largest builder/operator of offshore oil rigs in the world, with debt of $9.1 billion.

  • Canadian oil sands producer Laracina Ltd. defaulted on $127 million in debt. Texas oil driller WBH Energy LP declared bankruptcy, its lender had cut off credit, debts about $50 million. Three other publicly traded oil firms went bankrupt in October-November.

  • CreditSights Inc. said Jan. 7 that 25 U.S. shale firms are in near-term danger of defaulting on leveraged debt. This is the $200 billion loans part of the $500 billion shale debt bubble, to which rollover credit has essentially disappeared.

  • Junk bond interest rates in the energy sector, 4% about investment-grade last July, are now 11% above — there is no credit. For the overall "high-yield," $2.2 trillion bubble, interest rates were 2.5% above investment grade; they are 4.75% above now, so the oil/gas "contagion" is spreading.

  • Capital expenditure is falling fast. Among 40 publicly traded U.S. exploration and production (E&P) companies in oil/gas, the average cut in capital expenditure for 2015 has been 31% from 2014. Overall, energy is one-third of all capital expenditures, so this means a total cut by at least 10% from 2014 to 2015 for the whole economy.