Fed Tries To Rescue Super-Indebted Oil—More Wall Street Bailout
May 3, 2020 (EIRNS)—Treasury Secretary Steven Mnuchin said on April 29 that of the $454 billion of taxpayer funds allocated to the Treasury in the CARES Act for “backup” to Fed programs, some $200 billion has been put into the special purpose vehicles (SPV) which BlackRock is creating for the Fed’s immense bailout loans. Jerome Powell in his April 29 press conference confirmed, again, that these “equity and reserve tranches” are “standing in front of the Fed’s losses in these lending programs,” as the New York Times reported him—i.e., the taxpayer money will be lost first in these bailout loans to prop up collapsing securities and debt markets.
Mnuchin said Treasury is holding the remaining roughly $250 billion for new programs. At 10 a.m. on April 29 the Federal Reserve did indeed announce a new business loan program, this one for companies up to 15,000 employees and $5 billion annual revenues, and with other changes making it suitable to make loans to oil drillers and equipment makers. Under the Dodd-Frank Act the Fed is prohibited from openly targeting a loan program to just one industry, so it simply announced new parameters, and all reporters from OilPrice.com to The Hill immediately observed that the program was for the super-indebted U.S. oil industry. The oil price rose to $17.50, and then on April 30 to $19, in response.
The Fed will thus throw perhaps hundreds of billions in newly printed dollars at an industry which cannot come back. In most economic sectors where high-debt companies take “leveraged loans” or issue junk bonds, firms with a ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) much more than 6:1 are considered seriously overindebted. The U.S. oil industry’s ratio is 20:1. North American oil exploration and production companies have $86 billion in debt that will mature between 2020 and 2024; pipeline companies have an additional $123 billion coming due over the same period according to Moody’s; oil field service companies, another $100 billion. And all these companies will have dramatically reduced revenues for as long as oil demand remains greatly reduced, likely for years—although they will not last year’s in this business.
Through shale oil/gas production U.S. oil production more than doubled after the financial crash, from 5.5 million bpd in 2008 to over 13 million in 2019, helping create global oil gluts and needing to produce at higher prices than in most of the rest of the world. Pioneer Energy CEO Scott Sheffield—who is trying to get Texas to order 20 million bpd production cuts—says, “At $30-plus, the industry survives, but crippled. At $25 or below for several months to a year, the industry is decimated and will not return.”
With this Fed program, oil companies and their Congressional favorites are lobbying hard to be able to use the Fed loans to pay debt. This will underline that the loans are economically useless, but financial pass-throughs to Wall Street.