Big Banks Pull Financing, Prepare To Seize Assets From Collapsing Oil and Gas Industry

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The finances of the oil and gas industry are so dismal that the major banks that have funded the money-losing fracking boom are now exploring taking the unusual step of taking over the oil companies that cannot afford to pay back theย banks’ย loans.

Reuters reported that banks are exploring the option of seizing oil company assets because the more traditional route of bankruptcy will result in huge losses for the banks โ€” while seizing assets and holding them until oil prices increase would likely minimize thoseย losses.

Buddy Clark of law firm Haynes and Boone explained to Reuters that, โ€œBanks can now believably wield the threat that they will foreclose on the company and its properties if they donโ€™t pay their loanย back.โ€

While banks seizing assets from borrowers who canโ€™t repay loans is common for industries like real estate โ€” especially residential real estate โ€” it is an unusual move for the oil and gas industry. Reuters reported that the last time it happened was during the oil price crash of the late 1980s. In the most recent oil price crash, when oilย dropped from prices over $100 a barrel to $40 a barrel, there was a rash of bankruptcies, but the banks did not seizeย assets.

One difference now is that shale oil companies have continued to increase debt โ€” thanks to loans from the banks โ€” to the point where most of these companies are not viable with low oil prices. As one industry observer recently noted in The New York Times, โ€œThis is late โ€™80sย bad.โ€

One new angle that didnโ€™t exist in the 1980s is a dramatic change in sentiment from parts of the investment community about the viability of the oil industry as an investment. Television investment advisor Jim Cramer of CNBC was saying oil stocks were in the โ€œdeath knell phaseโ€ in January, before oil prices crashed to the current lows and the coronavirus had crushed global oilย demand.

More recently, in a remarkable opinion piece for Seeking Alpha, Kirk Spano advised investors to get out of the industry now with a unique twist on why this wasย urgent:

โ€œWe are about to see a massive wave of shale oil bankruptcies by thieving executives who have borrowed against assets and paid themselves bonuses for years without regard to shareholderย value.โ€

While DeSmog has commented on issues of potential industry fraud and executives paying themselves while the companies they ran lost money, it is a decided shift in sentiment when sites like SeekingAlpha are calling for investors to get out and then โ€œsue the dirt out of the executives who have almost all broken fiduciaryย duties.โ€

Which is why banks are now considering seizing the assets of the failed oilย  companies โ€” it is a bad option for the banks but it is the best oneย left.

Financing for Oil Asset Sales Notย Available

Understandably, these same banks that have financed the industry and the shale oil boom are not interested in making new loans for companies to acquire assets. This is causing another major problem for even the largest oil companies that had planned to fund current money-losing operations by sellingย assets.

BP had planned to sell its Alaskan assets to the company Hilcorp for $5.6 billion dollars, but now it appears the large banks are not willing to loan Hilcorp that money โ€” which according to the Wall Street Journal means the deal is likelyย dead.

This is an example of how the oil industryโ€™s reliance on debt is finally causing serious problems. As we have highlighted, the companies fracking shale for oil have always relied on debt but until recently that wasnโ€™t an issue for major oil companies like BP.

The Wall Street Journal reports the reason BP wanted to sell these assets is that the company also is highly leveraged, and planned to use this asset sale to pay down some of itsย debt.

This doesnโ€™t bode well for Exxonโ€™s plans to fund its ongoing operations by selling assets. Exxon had announced plans to raise $15 billion this year from asset sales, but it doesnโ€™t appear there are any lenders who are willing to loan that sort of money to companies wanting to buy oil and gasย assets.

Fracking Existed Because of Debt, Without New Loans It Canโ€™tย Exist

As we have documented on DeSmog, for the past two years the U.S fracking industry has borrowed approximately $250 billion more dollars than it has made selling fracked oil and gas. This has made a lot of fracking CEOs very wealthy and much of that money has also gone to Wall Street bankers โ€” and they wonโ€™t be giving itย back.

Without the option to borrow more money, the industry will be decimated. In a New York Times op-ed last week journalistย Bethany McLean highlighted thisย reality.

McLeanโ€™s book Saudi America highlighted the fatal flaws in the finances of the fracking industry and her current piece sums up the reality of the delusional finances of the frackingย industry.

โ€œIn reality, the dream was always an illusion, and its collapse was already underway. Thatโ€™s because oil fracking has never been financially viable,โ€ writesย McLean.

The banks know this, which is why they are no longer making loans to shale companies and are taking the last desperate step of seizing oil companyย assets.

But the banks know one other thing. Banks are first in line for bailouts and there will be plenty of money for them to navigate this issue. The big banks caused the housing crisis by making bad loans โ€” and were bailedย out.

The big banks funded the money-losing fracking industry for the past decade just like they funded the housing crisis โ€” but the reality is, just like in the housing crisis, the coming bailouts will protect theย banks.

What is different about this crisis is the housing market rebounded and continues on as a large part of the U.S. economy. If people like Jim Cramer are correct and the oil industry is in its โ€œdeath knell phaseโ€ โ€” future funding of the oil industry by these banks may not continue with the reckless abandon that fueled the great American fracking disaster.

Main image:ย Oil industry operationsย in the Permian Basin ofย Texas.ย Credit:ย Justinย Hamelย ยฉย 2020

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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