US shale lenders caught in energy sell-off – FT.com

The share prices of US banks based in the shale oil heartlands of America nosedived late last week after Opec’s decision to keep its current production rates sparked another steep fall in the price of crude.

BOK Financial, headquartered in Tulsa, Oklahoma, dropped as much as 4.4 per cent on Friday, while Cullen Frost, the biggest Texas-based bank, fell as much as 4.3 per cent. Louisiana-based MidSouth Bancorp declined 5.2 per cent while Dallas, Texas-based ViewPoint Financial fell as much as 7.45 per cent.

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According to estimates from bank analysts at Raymond James, MidSouth has one of the highest proportions of energy loans among midsized US banks at 20 per cent of its total institutional loan book, followed by BOK with 18.6 per cent and Cullen Frost with 14.9 per cent.

The sell-off in bank stocks and the drop in oil prices, which have fallen by more than a third since June, left many analysts mulling the outlook for smaller and midsized lenders in the epicentres of the recent US shale boom.

Massive investment by oil drillers and exploration companies in US energy and shale gas projects in recent years has been partly financed through cheap borrowing in the capital markets as well as loans from banks.

For smaller banks, which have relied on so-called commercial and industrial lending to boost profit margins in recent years, the concern is that a steep fall in the price of crude could take away one of their strongest revenue generators.

At an extreme, trouble in the shale industry could spark a wave of debt restructurings and even losses on banks’ energy-related loan portfolios.

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“It is a time to be prudent but not panic,” said Dick Evans, chairman and chief executive of Cullen Frost. “Energy companies are starting to look at their capital expenditure. For right now they’re continuing to drill and complete the projects they started.”

He noted that many of the oil companies Cullen Frost has lent to have hedged their production for 12 to 24 months and such loans are secured by collateral at a conservative advance rate of about 50 per cent.

“It’s easy to look at exposure and say those energy loans are going to go away. That’s just not the way it works,” said Michael Rose, bank analyst at Raymond James. “The banks in the energy sector have been in it for a very long time and they underwrite loans very conservatively.”

Still, investors clearly had the sector in their sights last week with share prices falling sharply for banks including Hancock Holding, Texas Capital Bancshares and Comerica.

Mr Rose at Raymond James said that energy-related loan balances at the banks could actually increase as the price of crude falls and oil and gas companies get shut out of the capital markets.

He added: “You could see energy loan balances grow at a time when conventional wisdom says they should shrink.”

via US shale lenders caught in energy sell-off – FT.com.