U.S. Shale Oil Firms Feel Credit Squeeze as Banks Grow Cautious

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April 12, 2016

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by Swetha Gopinath and David Henry (Reuters) Nearly two years into an epic oil rout, U.S. shale drillers that have upended global energy markets are finally feeling a credit squeeze as banks make their biggest cuts yet to their loans.

Every six months, oil and gas producers and their banks negotiate how much credit they should be given based on the value of their reserves in the ground.

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This time, with many companies’ hedges largely gone and crude prices used in the reviews as much as 20 percent lower than six months earlier, banks are getting tough.

Just a few weeks into the current round of talks more than a dozen companies have had their loans cut by a total of $3.5 billion, equivalent to a fifth of available credit, according to data compiled by Reuters.

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The squeeze puts further pressure on the shale industry to sell assets, cut jobs and drilling and shrink capital spending. It also raises the risk that more companies will tip into bankruptcy.

Banks are also under more pressure now from regulators to limit their energy-related risks as the downturn drags on.

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About 36 percent of some 150 energy companies with speculative grade debt will probably default on their obligations by the end of next year if oil holds around $35 a barrel, said Tarek Hamid, senior U.S. credit analyst at JPMorgan Chase & Co.

More than 50 North American oil and gas producers have entered bankruptcy since early 2015, according to a Reuters review of regulatory filings and other data.

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To the alarm of banks, some highly indebted companies, such as Linn Energy LLC, (LINE.O) drew heavily on their credit lines ahead of their loan talks, lawyers and analysts said. READ MORE

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