BOK Financial says energy book fuels strength

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BOK Financial in Tulsa, Oklahoma, said its bread-and-butter oil-and-gas loan portfolio shrunk slightly in the first quarter, a period in which commodity prices came under pressure. 

But the book grew from a year earlier, credit quality remained strong, and energy clients proved an important source of stability as the industry grappled with deposit outflows following regional bank failures in March.

The $46 billion-asset bank said Wednesday that energy loan balances — primarily loans to oil-and-natural gas producers — decreased by $27 million, or 1%, from the fourth quarter to $3.4 billion. Still, energy loans made up 15% of total loans at March 31, and those loans increased 13% from a year earlier. 

Total loans increased 1% from the prior quarter.

Executive Vice President Marc Maun said BOK expects energy to prove a strength through 2023, given strong global oil and gas needs.

"Energy continues to be pretty strong, and the outlook's good in that market," Maun said on the company's earnings call with analysts Wednesday.

Loan losses in energy are rare in the current era, he said. "I mean energy credit quality is about as good as it could possibly be," Maun added. "With oil prices, even with gas prices where they are, we have a strong borrowing base."

Benchmark West Texas Intermediate oil prices hovered between $70 and $80 per barrel during the first quarter — and continued to in April. This marked a notable decrease from prices of at least $90 in the fourth quarter of last year. Oil demand decreased early this year amid recession worries and lighter consumption of travel fuels, according to Rystad Energy, an energy research and data firm. Still, most producers can turn healthy profits with oil around $50 per barrel or higher, and profitability across the U.S. oil-and-gas sector proved strong over the past year and into the first quarter, Rystad noted.

Henry Hub natural gas prices, the U.S. standard, slumped during the first quarter to less than half the level of the prior quarter. This trend developed as demand for the heating fuel tapered off amid mostly mild weather conditions in the Eastern half of the country, a region that typically consumes a large share of the nation's gas during the winter.

The price declines contributed to some modest pullback in borrowing to invest in new drilling during the first quarter. But overall oil-and-gas production remains elevated, and Rystad projects that will remain the case through at least the summer.

Global demand for oil is expected to rise this summer as China's post-pandemic economy accelerates, and natural gas is in high demand across Asia as well as Europe. Asian countries want U.S. exports of gas to displace coal, while Europe needs American energy sources to fill a void created by Russia's war in Ukraine. A combination of sanctions against Russia and the Kremlin's retaliations against those penalties resulted in a sharp decrease in Russian gas sent to Europe over the past year. This is expected to endure, Rystad analysts say, fueling ongoing demand for U.S. exports.

All of this has supported robust production activity. U.S. oil production early in 2023 has held near two-year highs, and natural gas production has been close to record levels, according to the U.S. Energy Information Administration.

BOK said its unfunded energy loan commitments totaled $4.1 billion at the close of the first quarter, an increase of $246 million from the end 2022. This, the bank said, points to growth ahead.

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Strength on the loan side in energy can translate into deposit stability, as oil-and-gas companies often park their money at the same banks at which they have lending lines. For BOK, energy loans were the second-largest piece in its lending pie in the first quarter; health care credits were 17% of total loans. But on the funding side, energy banking is the largest industry concentration at 7% of total deposits, though BOK said its deposit base is diversified across multiple industries.

Following the failures of Silicon Valley Bank and Signature Bank in March, hastened by runs on their deposits, much of the industry lost deposits in the first quarter. BOK was not an exception; however, its executives largely attributed deposit outflows to customers' putting excess pandemic-era cash to work in new investments or purchases.

BOK's average deposits fell 6% during the first quarter, but the bank said this brought balances closer to historic norms relative to loans.

BOK's loan-to-deposit ratio for the first quarter was just under 70%. This compared with a pre-pandemic loan-to-deposit mean around 80%, indicating the bank has a healthy level of deposits relative to its historic needs.

"The net result of the disruptive March events to our deposit portfolio was not significant," Chief Financial Officer Martin Grunst said on the earnings call. Total deposit attrition in the first quarter "was the same amount as in" the prior quarter "and generally consistent with our guidance provided in January."

BOK reported first quarter net income of $162.4 million, or $2.43 per share. That compared with net income of $62.5 million, or 91 cents, a year earlier. The company recorded about $50 million of pretax trading losses in the year-earlier quarter.