Investors have a message for suffering U.S. oil drillers: We feel your pain.
They’ve pumped more than US$1.4 trillion into the oil and gas industry the past five years as oil prices averaged more than US$91 a barrel. The cash infusion helped push U.S. crude production to the highest in more than 30 years, according to data compiled by Bloomberg.
Now that oil prices have fallen below US$45, any euphoria over cheaper energy will be tempered by losses that are starting to show up in investment funds, retirement accounts and bank balance sheets. The bear market has wiped out a total of US$393 billion since June — US$353 billion from the shares of 76 companies in the Bloomberg Intelligence North America Exploration & Production index, and almost US$40 billion from high-yield energy bonds, issued by many shale drillers, according to a Bloomberg index.
“The only thing people are noticing now is that gas prices are dropping,” said Sean Wheeler, the Houston-based co-chairman of the oil and gas industry team for law firm Latham & Watkins LLP. “People haven’t noticed yet that it’s also hitting their portfolios.”
The money flowing into oil and gas companies around the world in the last five years came from a variety of sources. The industry completed US$286 billion in joint ventures, investments and spinoffs, raised US$353 billion in initial public offerings and follow-on share sales, and borrowed US$786 billion in bonds and loans.
50 Cents
The crash caught investors and lenders by surprise. Eight months ago, Houston-based oil producer Energy XXI Ltd. sold US$650 million in bonds. Demand was so high that the company more than doubled the size of the offering, company records show. The debt is now trading for less than 50 cents on the dollar, and the stock has declined 88%.
Energy XXI, which has more than US$3.8 billion in debt, is one of more than 80 oil and gas companies whose bonds have fallen to distressed levels, meaning their yields are more than 10 percentage points above Treasury debt, as investors bet the obligations won’t be repaid, according to data compiled by Bloomberg.
The stocks and bonds of Energy XXI and other struggling energy firms have been bought up by pension funds, insurance companies and savings plans that are the mainstays of Americans’ retirement accounts. Institutional investors had more than US$963 billion tied up in energy stocks as of the end of September, according to Peter Laurelli, a New York-based vice president of research with eVestment, an analytics firm in Marietta, Georgia, that gathers data on about US$22 trillion of institutional strategies.
Bank Lenders
Energy XXI’s second-largest reported shareholder is a group of funds managed by Vanguard Group Inc., the biggest U.S. mutual-fund firm, according to data compiled by Bloomberg. The top reported owner of the bonds Energy XXI issued in May is Franklin Resources Inc. in San Mateo, California, also known as Franklin Templeton Investments, which manages multiple funds that bought Energy XXI’s debt, according to data compiled by Bloomberg.
Energy XXI didn’t return calls and e-mails seeking comment. The company has “plenty of liquidity,” Greg Smith, a spokesman, said in a December interview.
A reckoning may also be in store for Energy XXI’s bank lenders. The company, which drills in the Gulf of Mexico, has tapped US$974 million of a US$1.5 billion credit line extended by a group of banks including Gulfport, Mississippi-based Hancock Holding Co.’s Whitney Bank; Amegy Bank of Texas, a subsidiary of Salt Lake City-based Zions Bancorporation; and Comerica Inc. in Dallas, according to data compiled by Bloomberg. Energy XXI has also borrowed money from banks in the U.K., Australia, Canada, Spain and Japan.
Struggling Drillers
The three U.S. banks are also among the lenders to other struggling drillers. The loans are backed by oil reserves that are worth less at today’s prices than they were when banks last performed scheduled revaluations of the collateral.
Representatives of Amegy, Comerica and Hancock declined to comment on the performance of specific loans. Shares of Zions have declined 15% this month. Comerica is down 9.8%, and Hancock slid 15%.
“This is a big deal for banks in states like Texas where oil is one of the most prominent businesses,” said Brady Gailey, an Atlanta-based analyst at Stifel Financial Corp.’s KBW unit. “There are going to be loan losses and it’s going to hit multiple banks that have exposure to that credit. It will slow economic growth, it could ding real estate values, banks will lose money and their stock will get slammed.”
Regional Lender
One regional lender with energy exposure is Lafayette, Louisiana-based MidSouth Bancorp Inc., with 21% of its US$1.25 billion of lending tied to oil and gas, according to regulatory filings.
Rusty Cloutier, MidSouth’s chief executive officer, said he’s not worried about the oil decline hurting his business because the bank’s portfolio consists of experienced oil and gas companies.
“There will be some players that get hurt, but the real players in the energy market aren’t going anywhere,” Cloutier said. “Companies who are leveraged very highly and got into the business not long ago, those are the ones that are going to get hurt.”
Hundreds of smaller banks in states such as Texas, Colorado, Oklahoma and North Dakota have also plunged into energy lending during the oil boom.
‘Very Concerned’
Gil Barker, the Office of the U.S. Comptroller of the Currency’s top overseer of community banks in states including Texas and Oklahoma, said he has confidence that the smaller lenders were doing what they should, though circumstances might change.
“We’re very concerned about the banks located in these oil-producing areas,” he said. “A prolonged time of low oil prices is really going to cause banks significant problems.”
More people will be affected than realize it, said Michael Shaoul, who helps oversee about US$9 billion as CEO of Marketfield Asset Management LLC in New York. “So much of this has ended up in 401(k)s and in pension funds and in mutual funds, and that’s where the bulk of the pain is going to be felt.”
Bloomberg.com
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