Cuts in the oil industry could get worse
The plunge in energy prices has forced companies drilling for oil and natural gas in the U.S. to cut spending substantially and lay off thousands of workers in Texas, North Dakota and other states that depend on the industry.
And those companies will likely pull back even more if the banks they rely on for loans tighten their purse strings in anticipation of a slow recovery for oil prices.
A new report by Moody's says there are more concerns than ever about the impact of low oil prices on U.S. banks that are deeply involved in oil and gas lending. The ratings agency did the analysis in a period when oil prices fell below $40 a barrel for the first time since 2009.
"This price decline, along with our expectations that oil prices will remain depressed until at least the end of 2016, is credit negative for U.S. banks with significant energy-lending concentrations because it will result in higher loan-loss provisions in coming quarters," the Moody's report said.
Those provisions require banks to set aside money to cover potential losses on loans.
"We don't see imminent significant losses coming," Joseph Pucella, a vice president and senior credit officer at Moody's, said of the agency's review of seven institutions with the highest concentration of energy loans among the banks that it rates.
On average, energy portfolios account for close to 75% of the seven banks' capital, much more than is the case for such lending at U.S. banks as a whole, according to Moody's.
The banks cited – BOK Financial, Hancock Holding Company, Cullen/Frost Bankers, Texas Capital Bancshares, Zions Bancorporation, Comerica and BBVA Compass Bancshares – have stable ratings from Moody's, including some with relatively high ratings.
"The banks do have strong capital positions, if you look at their metrics," Pucella said in an interview. "But to the extent that we see oil prices staying depressed over a longer period, that ultimately puts more pressure on the energy companies that these banks lend to, and so it could mean higher losses" for the banks.
As far as oil prices are concerned, Moody's, like other analysts, now expects them to stay lower for a longer time than previously anticipated, and well off from a peak of $115 a barrel as recently as June 2014.
In its latest forecast for oil, issued in August, Moody's said it expects prices to rise "only gradually" in 2016 and to average $52 a barrel for the year. Previously, the agency forecast oil prices increasing slowly to $60 in 2016.
Among the reasons for the more bearish outlook for oil prices are a large buildup in inventories and the potential for Iran to increase oil exports starting in 2016, thanks to the nuclear deal between Tehran and the U.S. and other world powers.
"The longer the prices stay low, the greater the risks to the banks," and the less likely they will be to lend to companies drilling for oil and gas, Pucella said.
At the same time, Moody's makes clear that lower oil prices are by and large good for most banks, whose concentration of energy loans is much less than that of the regional banks the agency cited in its report. Generally speaking, paying less for oil boosts U.S. GDP, drives business investment and saves money at the gasoline pump, all favorable conditions for banks and consumers alike.
But for banks heavily involved in oil and gas lending, the risks grow as oil prices fall.
For those banks, Pucella said, "I think this report has a more negative tone than the prior ones we've put out."
Bill Loveless – @bill_loveless on Twitter – is a veteran energy journalist and television commentator in Washington. He is a former host of the TV program Platts Energy Week.