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Who on Wall Street is Now Eating the Oil & Gas Losses?
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
Banks, when reporting earnings, are saying a few choice things about their oil-and-gas loans, which boil down to this: it’s bloody out there in the oil patch, but we made our money and rolled off the risks to others who’re now eating most of the losses.
On Monday, it was Zions Bancorp. Its oil-and-gas loans deteriorated further, it reported. More were non-performing and were charged-off. There’d be even more credit downgrades. By the end of September, 15.7% of them were considered “classified loans,” with clear signs of stress, up from 11.3% in the prior quarter. These classified energy loans pushed the total classified loans to $1.32 billion.
But energy loans fell by $86 million in the quarter and “further attrition in this portfolio is likely over the next several quarters,” Zions reported. Since the oil bust got going, Zions, like other banks, has been trying to unload its oil-and-gas exposure.
Wells Fargo announced that it set aside more cash to absorb defaults from the “deterioration in the energy sector.” Bank of America figured it would have to set aside an additional 15% of its energy portfolio, which makes up only a small portion of its total loan book. JPMorgan added $160 million – a minuscule amount for a giant bank – to its loan-loss reserves last quarter, based on the now standard expectation that “oil prices will remain low for longer.”
Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies that powered the shale revolution. These loans were backed by oil and gas reserves. Once a borrower reached the limit of the revolving line of credit, the bank pushed the company to issue bonds to pay off the line of credit. The company could then draw again on its line of credit. When it reached the limit, it would issue more bonds and pay off its line of credit….
Banks made money coming and going.
They made money from interest income and fees, including underwriting fees for the bond offerings. It performed miracles for years. It funded the permanently cash-flow negative shale revolution. It loaded up oil-and-gas companies with debt.
While bank loans were secured, many of the bonds were unsecured. Thus, banks elegantly rolled off the risks to bondholders, and made money doing so. And when it all blew up, the shrapnel slashed bondholders to the bone. Banks are only getting scratched.
Then late last year and early this year, the hottest energy trade of the century took off. Hedge funds and private equity firms raised new money and started buying junk-rated energy bonds for cents on the dollar and they lent new money at higher rates to desperate companies that were staring bankruptcy in the face. It became a multi-billion-dollar frenzy.
They hoped that the price of oil would recover by early summer and that these cheap bonds would make the “smart money” a fortune and confirm once and for all that it was truly the “smart money.” Then oil re-crashed.
And this trade has become blood-soaked.
The Wall Street Journal lined up some of the PE firms and hedge funds, based on “investor documents” or on what “people familiar with the matter said”:
Magnetar Capital, with $14 billion under management, sports an energy fund that is down 12% this year through September on “billions of dollars” it had invested in struggling oil-and-gas companies. But optimism reigns. It recovered a little in October and plans to plow more money into energy.
Stephen Schwarzman, CEO of Blackstone which bought a minority stake in Magnetar this year but otherwise seems to have stayed away from the energy junk-debt frenzy, offered these words last week (earnings call transcript via Seeking Alpha):
“And people have put money out in the first six months of this year…. Wow, I mean, people got crushed, they really got destroyed. And part of what you do with your businesses is you don’t do things where you think there is real risk.”
Brigade Capital Management, which sunk $16 billion into junk-rated energy companies, is “having its worst stretch since 2008.” It fell over 7% this summer and is in the hole for the year. But it remained gung-ho about energy investments. The Journal:
In an investor letter, the firm lamented that companies were falling “despite no credit-specific news” and said its traders were buying more of some hard-hit energy companies.
King Street Capital Management, with $21 billion under management, followed a similar strategy, losing money five months in a row, and is on track “for the first annual loss in its 20-year history.”
Phoenix Investment Adviser with $1.2 billion under managed has posted losses in 11 months of the past 12, as its largest fund plunged 24% through August, much of it from exposure to decomposing bonds of Goodrich Petroleum.
“The whole market was totally flooded,” Phoenix founder Jeffrey Peskind told the Journal. But he saw the oil-and-gas fiasco as an “‘unbelievable potential buying opportunity,’ given the overall strength of the US economy.”
“A lot of hot money chased into what we believe are insolvent companies at best,” Paul Twitchell, partner at hedge fund Whitebox Advisors, told the Journal. “Bonds getting really cheap doesn’t mean they are a good buy.”
After the bloodletting investors had to go through, they’re not very excited about buying oil-and-gas junk bonds at the moment. In the third quarter, energy junk bond issuance fell to the lowest level since 2011, according Dealogic. And so far in October, none were issued.
And banks are going through their twice-a-year process of redetermining the value of their collateral, namely oil-and-gas reserves. Based on the lower prices, and thus lower values of reserves, banks are expected to cut borrowing bases another notch or two this month.
Thus, funding is drying up, just when the companies need new money the most, not only to operate, but also to service outstanding debts. So the bloodletting – some of it in bankruptcy court – will get worse.
But fresh money is already lining up again.
They’re trying to profit from the blood in the street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce. Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the timing right and come out ahead.
Meanwhile, when push comes to shove, as it has many times this year, it comes down to collateral. Banks and others with loans or securities backed by good collateral will have losses that are easily digestible. But those with lesser or no protections, including the “smart money” that plowed a fortune into risks that the smart banks had sloughed off, will see more billions go up in smoke.
Next year is going to be brutal, explained the CEO of oil-field services giant Schlumberger. But then, there are dreams of “a potential spike in oil prices.” Read… The Dismal Thing Schlumberger Just Said about US Oil
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“And people have put money out in the first six months of this year…. Wow, I mean, people got crushed, they really got destroyed. And part of what you do with your businesses is you don’t do things where you think there is real risk not backstopped by the government.”
$500B in loans maturing in the next five years for O& G worldwide. Get the popcorn!
Meh. The oil patch is used to booms and busts. In Texas we already spent all the Yankee banksters' loans on pickup trucks and twenties for g-strings. So we'll bankrupt our corporations, liquidate our idle rigs to our pals at the Elks Club for spending money, and be ready to buddy-up and jump back in next go-round. Both feet.
I think the news about thr bigger-than-expected build in U.S. crude stocks added to concerns of a global oil glut.
U.S. Department of Energy's Energy Information Administration (EIA) showed on Wednesday. This was more than double analysts' expectations of a 3.9 million barrel build.
Hmmmmm...
Exporting Countries and non-member countries have been discussing the risk of low oil prices on reduced investment in new supplies but made no agreement to boost the market, so i find that interesting too.
Iran's Supreme Leader Ayatollah Ali Khamenei on Wednesday approved Tehran's nuclear deal with world powers but said the country should not give up core elements of its atomic program until allegations of past military issues had been settled. I mean WTF?
I hear some of the biggest oil traders are overwhelmingly bearish on the outlook for the crude price, which they believe will flounder below $60 a barrel. Or that is there calls, and they say its going to affect the market.Also, Another interesting fact is a scary & spooky HALLOWEEN INDICTOR has just triggered on the stock market, here => http://bit.ly/1jQPB7U with just days until actual holloween and it has alot of people confused. Quite interesting.
Heresy coming.
This is largely due to the lack of central planning - a financial and resource free-for-all.
On Russia Insider someone, in relation to Belarus, claimed that central planning is a dead end and cited Mises, but I'll paste the succinct reply provided by another commentator:
""Central economic planning is a dead end street, to be sure."
Prove it.
Post-war "economic miracle" Japan, post-war France, post-war Great Britain, etc, have all enjoyed unprecedented prosperity with central planning.
Subsequent liberalization is what brought their economies down.
"But has anyone noticed nine decades of US central planning under the rule of the Federal Reserve Bank?"
Those Libertarians are thick, aren't they? Central planning is operated by the State, otherwise it's not central planning.
The Fed is PRIVATE. That's not central planning in any form, shape or manner, that's a power grab by private interests backed by the State.
In other terms, a banana republic profile."
Well if the US had a responsible, rational government the shale debacle would never have happened, nor any number of other debacles like the current mess in the ME, which Putin and Co have carefully planned to try to sort out.
OK unleash the down arrows.
Just wear your own shackles and let the rest of the country be. The era of central planning is as dead as the Prison State. It's all over but for the doing.
"Rational government" is an oxymoron.
No it is not. Just because the circus in Washington displays little rationality and is really the agent of banks, corporations and the MIC, or AIPAC, it does not follow that all governments are like that.
Actually I'll argue that the US has no government per se. There's a fascistic revolving door, without the organizing element of a Mussolini - not that he should be emulated!
Take the trouble to look at the Kremlin site, perhaps especially the Security Council meetings, and see the difference. Or consider Singapore, whether or not you like the policies.
You've just thrown out a slogan, not an argument.
I expect that you are keen on business ventures and whatever passes for "capitalism", so in that case you might agree that a successful company requires governance and central planning - not employees running off in all directions.
If so, why do you imagine that a whole country - a mega-business really - can run successfully with amateurs only notionally in charge.
I'm not suggesting the extreme of Soviet five year plans for everything, nor governments owning/running everything.
So now voluntarily working at a private business = central planning? That's not an argument, that's just dumbassery.
Government, by its very definition, is monopoly violence. This is why all forms of government ultimately revolve around goons with shiny badges and guns enforcing their rules. Doesn't matter if the government is the hardcore Soviet kind that you denigrate, or the fluffy unicorn Singaporean version that apparently catches your fancy.
How are you going to prevent the government from eventually turning their guns loose on you?
This is so rife with error it's difficult to know where to begin to educate you. Clearly, you need to actually read Mises. Then, I suggest a perusal of Bastiat, of "what is seen and unseen" fame. If the western world has enjoyed unprecedented prosperity, how much more would we have had without it? Where in the phrase "central planning" do you see "official government"? A central planner does not have to be "the State." They just need the rule of law protecting their monopoly. And that the Fed does have. They operate under a little document called "The Federal Reserve Act." Although technically private, as the Fed "serves" private banks, the protection of the Act makes them quasi-governmental. Other than that, you are spot on!
OK audit the Fed and do an inventory on Fort Knox. See how far the Act gets you with no one to enforce it, if there is no State. It can't be done now. I never imagined that you'd be a bit of a fan of the Fed!
I have read some Mises and I note that he eschews science, instead asserting that his thesis is unfalsifiable.
Devotees have the advantage, then, that they have a priori "proof" wich can never be tested and never has been tested, because the theory has never been put into practice.
This is a stark contrast with the theory/practice of free market capitalism, partially implemented socialism, partially implemented Keynesianism, fascism/Nazism and neo-liberalism ... all of which have had results which can be criticized.
Post WW2 the West did enjoy unprecedented prosperity - perhaps you are too young to remember the 50s, 60s and early 70s - but the rot set in with Milton Friedman, Reaganomics, Thatcherism, etc., with Ayn Rand as the batty ideologue followed by such as Ron Paul and Alan Greenspan.
Thanks for the offer of "educating" me, but no thanks, I was never an ideologue and I'm not going to become one now.
The "rot" set in with the abandonment of the gold standard.
But look at the free market sucess of Somalia, no namby-pamby central planning for those fuckers.
Somalia is the result of government avarice. And it has lots of little governments now. They are tin pot thugs, just like the ones in DC.
I wonder how much exposure CalPers has.
My heart bleeds for poor Magnetar:
And this trade has become blood-soaked.The Wall Street Journal lined up some of the PE firms and hedge funds, based on “investor documents” or on what “people familiar with the matter said”:
Magnetar Capital, with $14 billion under management, sports an energy fund that is down 12% this year through September on “billions of dollars” it had invested in struggling oil-and-gas companies. But optimism reigns. It recovered a little in October and plans to plow more money into energy.
Stephen Schwarzman, CEO of Blackstone which bought a minority stake in Magnetar this year but otherwise seems to have stayed away from the energy junk-debt frenzy, offered these words last week (earnings call transcript via Seeking Alpha):
something tells me they'll pull through OK though:
http://www.economist.com/blogs/democracyinamerica/2010/04/financial_refo...
It is a good time to dig through the older oil and gas leases of these bankrupt companies and their leases. Those leases have production clauses in them that, if not met, nulify the lease and all you have to do is file it in court of the local county, very simple. These companies buy each other, merge the lease management staff until no one know what they are doing and let these lease expire.due too no production.. You as a royalty owner have no duty to inform the leasee of their fuck up.
All you have to do is, wait for another boom and release. The hole is already drilled and cased, so the new client just steps in and starts producing. It really pisses the original off, but they are the ones that fail to preform on the contract they provided.
Mineral rights in areas that newer tech has not moved into have been quite profitable. I should not be telling this secret, but I can;t buy all the lease
You can look brilliant if you have a relative with mineral rights, just saying!
If anyone is looking for a great investment, I've got a sure thing! Now for full disclosure, it is a turd sprinkled with glitter and wrapped in
a decorative bow, but it has an investment grade rating and has the potential to make your hands stink, so don't be put off by a bad market
environment and strike while the iron is hot. If you are managing pension fund monies, I especially want to reach out to you.
Please don't strike that turd with a hot iron, thench is already unbearable, before
flambeing the damn thing.
Losses are probably twice that, seems like China is not the only place you can't trust the numbers.
didn't you know the FED has become the trader of last resort. The American people will socialize the loss
The unofficial mega-bank motto..."You fucked up, you trusted us". No good way out unless the Fed buys all the trash paper which would lead to some very uncomfortable questions.....
"lead to some very uncomfortable questions....." about 7 years late for that
USG/USFRB aint never gonna pay any of this shit back - fuck Barry
These loans - when they go bad (and sure as eggs are eggs they will) then get ready for TARP to infinity.
Precisely.
The "official" debt is $18 Trillion, so what's another $36 Trillion to be slathered on Wall Street and the Elites whenever they "need" it?
BTW - no Social Security increases this year, because "there is no inflation", and for God's sake .gov is in debt!
Ummmmm the "taxpayer"? AKA "you and me"
"If you can't spot the sucker at the table-he's in the mirror"