Comerica Bank in Dallas is exploring the option of taking ownership stake in oil and gas companies that can’t repay their loans in the wake of collapsing oil prices brought on by the coronavirus pandemic.
The energy market went into a tailspin Monday as May futures contracts for WTI crude traded at unprecedented negative prices. Investors scrambled to unload the contracts before the delivery date of the oil when they would have no place to store it. The shutdown of the U.S. economy to ward off the spread of the new coronavirus has sapped demand for oil as consumers shelter in place, resulting in a massive supply glut that is weighing heavily on oil and gas companies and their lenders.
While the $76.3 billion-asset Comerica, the largest bank based in oil-rich Texas, is open to holding these assets rather than sell them off for a steep discount in a typical bankruptcy, the bank is not big enough to operate these companies themselves, Chief Credit Officer Peter Guilfoile said on a call with analysts Tuesday.
“Yes to own but not to operate,” Guilfoile said. “If we need to have an equity position in them, we’re prepared to do that.”
Larger competitors like JPMorgan Chase and Wells Fargo are exploring the idea of setting up shell companies to operate defunct energy companies, Reuters
Comerica increased its reserves to more than 10% of its $2.1 billion in energy loans in the first quarter. The bank’s total allowance for credit losses was $978 million at the end of March, up 46% from three months earlier, according to its financial report.
Comerica reported a $65 million loss for the first quarter, compared with a $339 million profit during the same period one year ago and $269 million in the fourth quarter. The bank set aside a first-quarter provision for credit losses of $411 million, up from $8 million during the previous three months.
In addition to energy loans, the bank reported about $3.6 billion in debt tied to companies that have been impacted by social-distancing policies, like hotels, retail stores and professional sports teams. About 3.6% of these loans are criticized, but Chairman and CEO and Curt Farmer said Tuesday that the fallout could be more far-reaching until the economy starts to stabilize later in the year as company officials expect.
“This impact is broad and it's really across all markets in almost all industries, not just those that are dealing with social-distancing sort of disruption,” Farmer said.
While Comerica’s energy book is down to 4% of its total loans from 7% during the collapse in prices in 2014, the economic picture this time appears to be more troubling. More than 23% of its energy loans are now considered criticized.
Like other energy banks, Comerica is in the middle of its occasional assessment of its borrowers’ assets, which fluctuate with the price of oil. As these values drop, Guilfoile warned of a liquidity squeeze for these companies that suddenly have less collateral to borrow against.
On top of that, the plunge in May contract prices for crude is likely to accelerate cuts in production for drillers until prices snap back, Goldman Sachs researchers said in a note Tuesday.
Guilfoile said two-thirds of its oil and gas companies can still break even with oil in the mid-$20 per barrel range. Futures contracts for WTI crude beyond June were still trading in this range as of Tuesday morning.
“It’s not so important where oil is today or next week or a month from now, it’s where it settles in over a longer period of time,” Guilfoile said. “We are going to be triaging the portfolio. We’re going to be working with our borrowers to just get through it.”
