Median Debt to EBITDA is 3.6 Times across 77 U.S. E&P Companies: EnerCom Analytics
It happened when ‘lower for longer’ went from being a popular catch phrase to bitter reality. Today, bankruptcy has become an increasingly common word across the energy sector.
Increasing federal oversight of oil and gas lending, decreasing cash flows and higher leverage ratios for oil and gas producers have all led to increased scrutiny of loans in the energy sector.
In March, 2016, Moody’s warned the Oil & Gas Liquidity Stress Index had surged to a record high of 27.2% following the downgrade of 19 energy companies. This rise surpassed the previous high of 24.5% for the index recorded during the last recession. The implication is that 27.2% of the oil and gas sector now face looming credit problems due to overextended leverage.
Due to the position of being a first lien lender, large banks have been shielded from the fray more so than second and third lien note holder, or so the banks believed. As the commodity downturn has held for longer, regulators have begun to step in and require more stringent lending requirements. EnerCom Consulting has heard from lenders that a line is being drawn at 4.0 times debt to EBITDA as spring redeterminations are considered and implemented. This metric speaks to the view changing from first lien holder to a more comprehensive view of overall debt.
In the EnerCom Analytics database, the median debt to EBITDA is 3.6 times across 77 U.S. E&P companies.
Regulatory Filings Show Signs of Stress
Banks are beginning to show signs of concern as first quarter regulatory filings are being released.
On Friday April 29, 2016, JP Morgan said in an SEC filing that the company was experiencing a substantial increase in loans characterized as “criticized.” The company experienced a 45% increase in criticized loans jumping to $21.2 billion as of March 31, 2016 from $14.6 billion at year end 2015. JP Morgan loans specifically to oil and gas increased from $4.5 billion to $9.7 billion, a 115% increase.
On May 4, 2016, Wells Fargo echoed that sentiment by announcing the company saw a 62% increase in commercial and industrial loans that regulators have labeled as criticized. The increase to $30 billion in the first quarter from $18.5 billion at year-end was largely primarily attributable to oil and gas loans.
A classification of criticized does not imply that all of these loans are imminently doomed, but certainly raises a red flag. JP Morgan noted that many of the loan holders were still making loan payments and that non-performing loans only comprised about $1.7 billion of the oil and gas loans.
On April 19, 2016, Comerica Inc. reported that the profits of the bank had taken a hard hit from oil and gas lending with more than half of the energy loans at the bank are marked as “criticized” now.
