Will Shale Oil Defaults Unravel The Banks?

Date: 19 Jan 2016

With oil price hovering near the US$30 per barrel range, intense pressure has shifted towards the shale oil producers, once touted as the swing producers, the US shale oil companies are facing the potential collapse, wrought on by years of over leveraging and unabashed borrowings.

According to The Wall Street Journal, total debt among US and Canada oil producers amounted to US$353B for the period from 2010 – 2015.

Bloomberg recently compiled  alist of shale oil producers and where they stand when it comes to their level of debts (source: Zerohedge and Bloomberg):

Notice that the size of the borrowing shave shrunk as banks moved into panic mode? With reduced borrowings and a falling price, it is doubtful these 25 companies listed above can survive past 2016. A falling demand for high yield junk bonds has not helped these companies either as investors shun high yield risky investments.

According to Fadel Gheit, a senior analyst at Oppenheimer & Co, one half of US shale oil producers will not survive the ongoing oil price plummet.

But what about the impact on banks.

So far, several banks have indicated that they will increase their provision for doubtful debts, chief among them:

Well Fargo, which reported a US$17B exposure on energy related loans and currently incurred a loss provision of US$1.2B in its energy related portfolio

BOK Financial Corporation advised its investors that it will be making aprovision for credit losses amounting to US$22.5M

JP Morgan too made similar provision amounting to US$89M.

Citibank when asked by analysts whether it made any provisions for credit losses, declined to divulge. At that lingering question mark, speaks a lot about Citibank.

So as shale oil companies face potential default, could banks be the next victim? We will know in a quarter or two.

I will be looking at a short financials ETF if more banks make further provisions for energy related credit losses.

The above is just my opinion. You advised to do your own due diligence.

About The Author


Author of the books “Invest In Foreign Shares!” and “Invest In REITs!” both books are available at Popular bookstores “Invest In Foreign Shares!” reached Popular’s top 10 bestseller in August 2014 in the non-fiction category

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