While remaining cautious, banks heavily exposed to the energy sector adopted more bullish tones during the fourth quarter earnings season this month. Executives said that a recovery in oil prices combined with an early end to the pandemic could pave the way for increased oil and gas revenues in 2021 and a substantial reduction in distressed loans.
During the second and third quarters of 2020, banks active in energy loans set aside millions of dollars in reserves to cover sour loans, as energy companies struggled amid demand shocks imposed by coronavirus outbreaks. Banks have reported high levels of loan defaults in addition to canceling loans related to companies that have filed for Chapter 11 bankruptcy.
Executives at Salt Lake City-based Zions Bancorp said on the company’s recent earnings call that about 80% of write-offs in the fourth quarter were related to the Lower 48 energy sector. However, the level of lending in difficulty stabilized in the final months of 2020, and the bank anticipates an improvement this year.
“We still believe there are risks, so we’ll be cautious” about new loans, Zions CEO Harris Simmons said. Still, “I think we’re getting more and more optimistic” about the ability of existing borrowers to repay their loans.
Zions and other banks made their assessments based on the new determinations of energy lending in fall 2020, the prevailing macroeconomic outlook for the US economy which projects growth of around 5% this year, and expectations according to which widespread immunizations this spring could fuel a rebound in demand for transport fuels.
Melinda Chausse, director of credit at Dallas-based Comerica Inc., said on an earnings call this month that lending to energy companies remains the most stressed component of the bank’s portfolio. However, distressed loan levels have “stabilized quite well” and “we are perhaps living the worst of this situation”. With West Texas Intermediate oil prices hovering above $ 50 / bbl this month, “we’re feeling pretty good about all of these risky borrowers.”
The prospects of an end to the pandemic this year are increasing as vaccines become more available, analysts said, and demand for oil in particular could increase when that happens. Demand for jet fuel and gasoline was under great pressure in 2020 and remains below pre-pandemic levels. However, if travel increases due to pent-up demand, oil prices could rebound. More vigorous industrial activity could also develop, fueling increased demand for natural gas.
Analysts, however, are also careful to temper their optimism with a dose of caution.
“Now that the live fire is being fired, the timing of the vaccination is no longer a guess – although the road to herd immunity and post-pandemic life is long and difficult,” analysts at Raymond James & Associates Inc. headed by Pavel Molchanov said in a report this week.
While travel trends are likely to be uneven and some parts of the world may experience epidemics during the summer, analysts said January was most likely to be trough and travel-related demand could rise in the summer. the coming months, providing tailwind for power.
“We believe the global total blockages will decline after January, with February better than January and March better than February,” Raymond James’ team said.
The Organization of the Petroleum Exporting Countries (OPEC) said earlier this month that it expects global oil demand in 2021 to increase by 5.9 million b / d per year and on average. of 95.9 million bpd. The group estimated that demand in 2020 fell 9.8 million bpd from the previous year.
OPEC, however, warned that “uncertainties remain high moving forward, with the main downside risks being issues related to Covid-19 containment measures and the impact of the pandemic on consumer behavior. “
Beyond 2021 and the pandemic, US companies dependent on fossil fuel production could face increasing regulatory pressure and fewer drilling opportunities.
The Biden administration last week arrested for two months new permits for oil and gas drilling, as well as leases on federal onshore and offshore properties. The president said he could follow up on such action as early as Wednesday with more permanent measures as part of an effort to put the United States on the path to a carbon-free economy. energy sector by 2035 and a carbon neutral economy by 2050.
Biden’s environmental policies could hamper profits in the energy sector for years to come, the banks have also warned. Several banks have said they remain committed to energy, but have no plans to significantly increase their oil and gas portfolios.
Some banks have said, however, that they see growth on the horizon. BOK Financial in Tulsa, for its part, reduced its reserves to cover bad debts on energy in the fourth quarter. He said the finances of oil and gas borrowers are mostly stable and many of his clients are on the cusp of post-pandemic growth.
“If you think of oil… between $ 50 and $ 55 that’s not a bad place, in terms of stability,” BOK executive vice president of finance Stacy Kymes said on the earnings call. this month. “And certainly, in the Permian basin, this is an area where people can continue to grow and do so profitably. From our point of view, it’s a price zone where once we can find some kind of stable place, then I think we can grow from here. “