Seeing greater challenges for the energy sector, investment banks are starting to cut off credit to oil producers.
JPMorgan, a U.S.-based investment bank, announced it would limit credit availability to energy firms by cutting their credit lines by about 15% to 20%, on average. JP Morgan commercial bank head, Doug Petno, said at an investor conference that some energy firms might see even less access to cash in the coming months. "Some [credit lines] may go down by 50 percent,” he said.
The move is an attempt for the bank to limit its energy exposure as several firms, like LinnEnergy and Conoco Phillips, have resorted to drastic measures, such as cutting dividends or maxing out revolving credit lines, to help the firms as they sell oil at a loss or at a razor-thin profit. The move has been criticized by many financial analysts as wallpapering over an endemic addiction to debt that low oil prices can no longer sustain.
No Quarter for Oil
Petno’s words to oil firms were unusually harsh, as he showed no mercy for the companies’ need for cash. "We are not waiting for the spring redetermination to discuss this with our clients,” he said, dismissing speculation that the bank would wait to see if oil prices perk up before cutting credit access.
The diminishing access to credit and worsening cash flows mean many companies are facing closures and bankruptcies, which Petno acknowledged to investors. "There will be a meaningful number of these players who have no options. I think we have only begun to see the range of bankruptcies in oil and gas,” he said.
The bank is also increasing its reserves to protect itself from energy-related defaults by putting $500 million in a fund.
Several investment bank stocks fell on the news, as investors expected more investment banks to put cash in reserves to cushion themselves against higher energy-related defaults. JP Morgan also hinted that it might need to increase its reserves against energy defaults by $1.5 billion if oil remains below $30 per barrel for the next 18 months.
Several analysts have already predicted oil may remain below that price point for a significant time to come. Oil prices fell earlier this week as Iran dismissed Saudi Arabia’s proclamation that it was freezing oil production, calling it a “joke”.
Emerging Market Woes
JP Morgan CEO Jamie Dimon also acknowledged that slow growth in China was crimping the bank’s Asian expansion and was threatening its emerging market presence globally. Dimon said that he expects China to become fully economically developed in the next 20 years and he wants JP Morgan to be part of the company’s financial infrastructure as it reaches that point.
Likewise, he acknowledged weak manufacturing in the U.S. as a possible effect of weakness in China, but also noted that debt-to-servicing ratios were at their lowest level in 35 years, putting the American consumer in a “good spot."