“Everyone in the [shale] chain was making money in the short term.”
When Whiting Petroleum needed cash earlier this year as oil prices plummeted, JPMorgan Chase, its lead lender, found investors willing to step in. The bank helped Whiting sell $3.1 billion in stocks and bonds in March. Whiting used almost all the money to repay the $2.9 billion it owed JPMorgan and its 25 other lenders. The proceeds also covered the $45 million in fees Whiting paid to get the deal done, regulatory filings show.
Analysts expect Whiting, one of the largest producers in North Dakota’s Bakken shale basin, to spend almost $1 billion more than it earns from oil and gas this year. The company has sold $300 million in assets, reduced the number of rigs drilling for oil to eight from a high of 24, and announced plans to cut spending by $1 billion next year. Eric Hagen, a Whiting spokesman, says the company has “demonstrated that it is taking appropriate steps to manage within the current oil price environment.” Whiting has said it will be in a position next year to have its capital spending of $1 billion equal its cash flows with an oil price of $50 a barrel.
As for Whiting’s investors, the stock is down 36 percent, as of Oct. 14, since the March issue, and the new bonds are trading at 94¢ on the dollar. More than 73 percent of the stocks and bonds issued this year by oil and gas producers are worth less today than when they were sold, data compiled by Bloomberg show.
Banks’ sell-the-risk strategy underpins the shale oil boom. Lenders extended low interest credit to wildcatters desperate for cash, then—perhaps remembering the 1980s oil bust—wheeled the debt off their books by selling new stocks and bonds to investors, earning sizable fees along the way. “Everyone in the chain was making money in the short term,” says Louis Meyer, a special situations analyst at Oscar Gruss & Son. “And no one was thinking long term about what they’re going to do if prices fall.”
North American oil and gas producers have sold $61.5 billion in equity and debt since January, paying more than $700 million in fees, according to data compiled by Bloomberg. Half the money was raised to repay loans or restructure debt, the data show. “Being there for our clients in all market environments, particularly the tough ones, is something we feel very strongly about,” says Brian Marchiony, a JPMorgan spokesman. “During challenging periods, companies typically look to strengthen their balance sheets and increase liquidity, and we have helped many do just that.”
Lenders have been setting aside cash to cover potential energy losses. JPMorgan bolstered its reserves by $160 million in the third quarter. Bank of America’s at-risk loans increased 15 percent from a year ago as a result of the deteriorating finances of some of its oil and gas borrowers. Still, the oil bust has left banks relatively unscathed. Asked why lenders weren’t seeing more losses from energy defaults, BofA Chief Executive Officer Brian Moynihan said in a conference call, “A lot of that risk is distributed out to investors.”
Citigroup, Bank of America, and JPMorgan were among the banks that courted fast-growing shale drillers in the hope that an initial loan would lead to investment banking business. Citigroup’s energy portfolio, including loans and unfunded commitments, swelled to $59.7 billion as of June 30, Bank of America’s to $47.3 billion, and JPMorgan’s to $43.6 billion, according to company filings. “They loan money at cheap rates, and the banks get the fees from the bond and share sales,” says Jason Wangler, an analyst with Wunderlich Securities. “When things are going well, it’s mutually beneficial. Now it’s a different conversation.”
When crude prices plummeted in the early 1980s, hundreds of banks failed across such oil-rich states as Louisiana, Oklahoma, and Texas. This time around, banks were keen to limit their exposure to a boom-and-bust industry. Every year since 2009, about half the debt and equity sold by North American exploration and production companies was intended, at least in part, to restructure debt or repay loans, data compiled by Bloomberg show. Often the banks selling the securities were the ones getting repaid. “The bankers have gone through this before,” says Oscar Gruss’s Meyer. “They know how it works out in the end, and it’s not pretty. Most of the lenders have been more on top of things this time. They are not going to get caught short in the ways they got caught short before.”
The bottom line: Oil companies have sold $61.5 billion in stocks and bonds since January as oil prices have tumbled.