Rebounding oil prices give new hope to energy lenders

The energy sector has the potential to quickly recover if vaccines bring an end to the coronavirus pandemic.

Banks with large exposure to oil and gas companies have set aside millions of dollars to buffer against potential losses after lockdowns and social distancing cut into energy consumption and contributed to a plunge in oil prices.

But those lenders have struck a cautiously optimistic tone in recent months as lockdowns eased and progress was made with the vaccine. Oil prices, which fell below $20 a barrel in April, are recovering and have hovered around $45 since late November. And the stocks of companies in the S&P 500’s energy sector rose by nearly 30% last month after a sharp plunge earlier in the year.

Bankers expect more Americans to get back on the road and boost fuel consumption by the summer, potentially lifting the energy sector out of the pandemic’s malaise. The view is that the industry should bounce back faster than other sectors, such as hotels and dine-in restaurants, that have also been hit hard in 2020. That would help more energy customers get back on track with loan payments, and possibly create new lending opportunities.

If “vaccine efficacy and distribution happen, as I think we are all hopeful of, I see the second half [of 2021] being reasonably optimistic,” Melinda Chausse, Comerica’s chief credit officer, said during a Tuesday presentation at a virtual conference hosted by Goldman Sachs.

To be sure, bankers are still dealing with issues in their energy portfolios.

Nonperforming loans at the $84 billion-asset Comerica rose by 20% in the third quarter from a quarter earlier, to $325 million, with energy accounting for the bulk of the increase. And executives have cautioned that credit quality in the energy book will be choppy over the next few quarters.

Though remaining cautious, executives at Regions Financial in Birmingham, Ala., have said that pent-up demand, including air travel, could eventually give oil and gas companies a boost.

Downgrades in energy loans at the $145 billion-asset company contributed to a 25% increase in nonperforming loans in the third quarter from a quarter earlier, to $767 million. But executives said they are seeing signs of improvement as oil prices stabilize.

“Sooner or later the law of supply and demand really comes back into play in a big way,” Ronald Smith, Regions’ head of corporate banking, said during a November conference hosted by Bank of America.

Another wildcard is the outcome of negotiations in Washington over a new round of economic stimulus, said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings.

The bulk of earlier government aid tied to the pandemic runs out by year-end, and Bovino said more federal assistance and vaccine success are vital as infections surge across the country.

Bovino said her firm's downside scenario has the U.S. economy growing by just 0.8% in 2021, assuming a protracted pandemic and no new stimulus. S&P Global Ratings projects a rebound of as much as 4.5% if more aid is approved and the vaccination program succeeds.

A “rapid deployment” of vaccines “could accelerate” demand for gas and jumpstart production, hastening a recovery for companies that drill and refine oil, said Randy Ollenberger, an energy analyst at BMO Capital Markets.

The International Energy Agency in Paris has also struck an optimistic tone, projecting that daily oil production could increase by 5.8 million barrels globally in 2021 after contracting by 8.8 million this year.

Against that backdrop, BOK Financial in Tulsa, Okla., entered the fourth quarter with a balance of caution and greater confidence about next year. Its loan-loss allowance for energy loans was equal to 4.3% of the book on Sept. 30, or more than double the coverage for the rest of its portfolio.

Overall, problem loans declined modestly during the third quarter, led lower by improvement among energy credits.

“I feel good about kind of where we are from a loss content perspective there,” Stacy Kymes, BOK’s executive vice president, said during the $46 billion-asset company’s most-recent earnings call.

A BOK spokeswoman said the company’s views on the sector have held steady into December.

“Energy borrowers continue to pay down debt to reduce leverage at this point in the cycle,” Kymes added during the call. “Despite these factors, we remain open for business and continue to support our customers in the energy industry. … We remain optimistic about our ability to enhance market share long term.”