AEGIS View: Banks, long thought to avoid owning producing assets, are planning for taking control.
“Major U.S. lenders are preparing to become operators of oil and gas fields across the country for the first time in a generation to avoid losses on loans to energy companies... .”Reuters, 4/9/2020
Source headline and article (opens in new tab): Exclusive: U.S. banks prepare to seize energy assets as shale boom goes bust
- Reuters says lenders to oil and gas companies are taking steps to be the operators of oil- or gas-producing assets held as collateral
- Banks are establishing separate entities to own oil and gas assets
- JPMorgan, Wells Fargo, and Bank of America were each named
We’ve heard it said “They’ll reorganize and emerge from bankruptcy. After all, the bank doesn’t want to own the asset.” But maybe that’s not true.
A lender’s calculus behind whether to seize collateral is likely a balance between (1) If the debt is restructured, will it be repaid, and (2) Is the asset better owned by us? In some situations, banks may be reaching the conclusion that the better “bad” choice is to operate the asset themselves.
There are some possible oil and gas market implications. First, it seems unlikely that banks would be willing to invest growth capital. Maintenance capital? Yes, to keep the producing wells performing. But additional development dollars would be withheld. This means that for the seized assets, we should expect them to decline and not add new supply to the market.
Second, it sounds like a temporary fix. As prices move higher and risk capital returns to the industry, banks would likely be looking for a buyer of the producing assets and the PUDs that come with it.
Last, if the phenomenon of bank-owned producing assets becomes widespread, it may become an interesting price-discovery mechanism. The industry may be looking to these deals as gauges of the health of M&A in the post-Covid-19 world.
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