CW8888: Any investment by nature is risky
(Bloomberg) -- Investors have a message for suffering U.S.
oil drillers: We feel your pain.
They’ve pumped more than $1.4 trillion into the oil and gas
industry the past five years as oil prices averaged more than
$91 a barrel. The cash infusion helped push U.S. crude
production to the highest in more than 30 years, according to
data compiled by Bloomberg.
Now that oil prices have fallen below $45, any euphoria
over cheaper energy will be tempered by losses that are starting
to show up in investment funds, retirement accounts and bank
balance sheets. The bear market has wiped out a total of $393
billion since June -- $353 billion from the shares of 76
companies in the Bloomberg Intelligence North America
Exploration & Production index, and almost $40 billion from
high-yield energy bonds, issued by many shale drillers,
according to a Bloomberg index.
“The only thing people are noticing now is that gas prices
are dropping,” said Sean Wheeler, the Houston-based co-chairman
of the oil and gas industry team for law firm Latham & Watkins
LLP. “People haven’t noticed yet that it’s also hitting their
portfolios.”
The money flowing into oil and gas companies around the
world in the last five years came from a variety of sources. The
industry completed $286 billion in joint ventures, investments
and spinoffs, raised $353 billion in initial public offerings
and follow-on share sales, and borrowed $786 billion in bonds
and loans.
50 Cents
The crash caught investors and lenders by surprise. Eight
months ago, Houston-based oil producer Energy XXI Ltd. sold $650
million in bonds. Demand was so high that the company more than
doubled the size of the offering, company records show. The debt
is now trading for less than 50 cents on the dollar, and the
stock has declined 88 percent.
Energy XXI, which has more than $3.8 billion in debt, is
one of more than 80 oil and gas companies whose bonds have
fallen to distressed levels, meaning their yields are more than
10 percentage points above Treasury debt, as investors bet the
obligations won’t be repaid, according to data compiled by
Bloomberg.
The stocks and bonds of Energy XXI and other struggling
energy firms have been bought up by pension funds, insurance
companies and savings plans that are the mainstays of Americans’
retirement accounts.
Institutional investors had more than $963
billion tied up in energy stocks as of the end of September,
according to Peter Laurelli, a New York-based vice president of
research with eVestment, an analytics firm in Marietta, Georgia,
that gathers data on about $22 trillion of institutional
strategies.
Bank Lenders
Energy XXI’s second-largest reported shareholder is a group
of funds managed by Vanguard Group Inc., the biggest U.S.
mutual-fund firm, according to data compiled by Bloomberg. The
top reported owner of the bonds Energy XXI issued in May is
Franklin Resources Inc. in San Mateo, California, also known as
Franklin Templeton Investments, which manages multiple funds
that bought Energy XXI’s debt, according to data compiled by
Bloomberg.
Energy XXI didn’t return calls and e-mails seeking comment.
The company has “plenty of liquidity,” Greg Smith, a
spokesman, said in a December interview.
A reckoning may also be in store for Energy XXI’s bank
lenders. The company, which drills in the Gulf of Mexico, has
tapped $974 million of a $1.5 billion credit line extended by a
group of banks including Gulfport, Mississippi-based Hancock
Holding Co.’s Whitney Bank; Amegy Bank of Texas, a subsidiary of
Salt Lake City-based Zions Bancorporation; and Comerica Inc. in
Dallas, according to data compiled by Bloomberg. Energy XXI has
also borrowed money from banks in the U.K., Australia, Canada,
Spain and Japan.
Struggling Drillers
The three U.S. banks are also among the lenders to other
struggling drillers. The loans are backed by oil reserves that
are worth less at today’s prices than they were when banks last
performed scheduled revaluations of the collateral.
Representatives of Amegy, Comerica and Hancock declined to
comment on the performance of specific loans. Shares of Zions
have declined 15 percent this month. Comerica is down 9.8
percent, and Hancock slid 15 percent.
“This is a big deal for banks in states like Texas where
oil is one of the most prominent businesses,” said Brady
Gailey, an Atlanta-based analyst at Stifel Financial Corp.’s KBW
unit. “There are going to be loan losses and it’s going to hit
multiple banks that have exposure to that credit. It will slow
economic growth, it could ding real estate values, banks will
lose money and their stock will get slammed.”
Regional Lender
One regional lender with energy exposure is Lafayette,
Louisiana-based MidSouth Bancorp Inc., with 21 percent of its
$1.25 billion of lending tied to oil and gas, according to
regulatory filings.
Rusty Cloutier, MidSouth’s chief executive officer, said
he’s not worried about the oil decline hurting his business
because the bank’s portfolio consists of experienced oil and gas
companies.
“There will be some players that get hurt, but the real
players in the energy market aren’t going anywhere,” Cloutier
said. “Companies who are leveraged very highly and got into the
business not long ago, those are the ones that are going to get
hurt.”
Hundreds of smaller banks in states such as Texas,
Colorado, Oklahoma and North Dakota have also plunged into
energy lending during the oil boom.
‘Very Concerned’
Gil Barker, the Office of the U.S. Comptroller of the
Currency’s top overseer of community banks in states including
Texas and Oklahoma, said he has confidence that the smaller
lenders were doing what they should, though circumstances might
change.
“We’re very concerned about the banks located in these
oil-producing areas,” he said. “A prolonged time of low oil
prices is really going to cause banks significant problems.”
More people will be affected than realize it, said Michael
Shaoul, who helps oversee about $9 billion as CEO of Marketfield
Asset Management LLC in New York. “So much of this has ended up
in 401(k)s and in pension funds and in mutual funds, and that’s
where the bulk of the pain is going to be felt.”
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