By Jessica Resnick-Ault
(Reuters) - A recent U.S. regulatory review could force banks to scale back loans to energy companies whose revenues have been hit hard by falling oil prices, and could force more oil drillers into bankruptcy, analysts said.
In the coming weeks, banking regulators including the Federal Reserve, the Federal Deposit Insurance Corp, and the Office of the Comptroller of the Currency are due to release the results of their regular look at banks' loan books known as the "shared national credit" review. The review was previously annual but is shifting to twice a year starting in 2016.
With oil prices having plunged 60 percent from their peak in June 2014, revenues for energy companies have fallen, giving them less money to pay interest on loans. Hedging contracts bought many lenders time by bolstering their cash flow but those contracts are maturing.
Lenders will likely have to tighten the screws by scaling back credit lines or refusing to renew loans coming due. At least some borrowers will struggle to repay their obligations, and will have to reorganize, or go under, analysts said.
"Energy companies are running for cover when it comes to cash flow, and banks know it. Lenders have been guarding themselves from the declining creditworthiness of the companies, and that will continue," said Mike Holland, who oversees more than $4 billion of assets at Holland & Co in New York.
In September the OCC met with banks including Wells Fargo (N:WFC) Corp and JPMorgan Chase & Co (N:JPM) to discuss the impact of falling commodity prices on outstanding loans. The banks declined to comment.
Until recently, as long as companies kept paying interest, many lenders were willing to look the other way as revenue fell. Banks relaxed loan conditions known as "covenants" that, for example, required the company to generate a certain level of operating income relative to interest payment requirements.
"The lenders want to avoid being the cause of a company's bankruptcy filing," said Doug Getten, a Houston-based partner at law firm Paul Hastings who focuses on corporate finance, adding that banks don't want to have to take over the companies and manage them.
In 2014, according to the shared credit report for that year, regulators looked at about $788.6 billion of loans to commodities companies, or about 25 percent of the loans that regulators looked at overall.
Bankers say they want to continue extending credit where they can.
"Companies that have done the right thing and continue to do the right thing I think are going to continue to get some rope from their banks," said Rich Gould, managing director and head of energy credit and risk management at Wells Fargo, speaking at a conference in Houston last month. He was discussing banks in general, and not his own in particular.
At least 10 companies have taken advantage of that flexibility, government filings show.
This week, Goodrich Petroleum said lenders had revised its $75 million credit facility, allowing it greater flexibility through 2017.
Earlier, companies such as Halcon Resources Corp, with assets in North Dakota and Texas, had seen their covenants relaxed. Some, like EV Energy Partners, even saw their borrowing bases rise, in their case by 25 percent to $625 million, in tandem with looser covenants.
The news may be bad for some energy companies but banks say they have set aside enough money to cover credit losses on the loans.
In last year's shared national credit review, regulators said credit risk had not grown from the prior year.