Oil Firms Wishing to Expand Output Face Balky Lenders
Despite the surge in oil prices after Iraq’s invasion of Kuwait, there is no gusher of money available to finance expanded U.S. oil exploration and production.
That means that even if continuing Mideast hostilities revive interest in domestic oil production, getting money to finance it could be a major hurdle. The prospect of tight money worries experts who believe that it will take substantial amounts of credit to rebuild an oil industry infrastructure devastated by the energy recession of the 1980s.
“The guy who wants to drill has to hire a guy with crews and equipment. It’s the guys who have the crews and equipment who are strapped for capital. They have no place to go at all,” said Matthew Simmons, who heads a Houston investment banking firm that raises money for oil service companies.
Call it a legacy of the 1980s. Banks and investors, buoyed by optimistic forecasts 10 years ago that crude prices would be as high as $100 a barrel by this year, turned on a tap of money to wildcatters and oil companies.
But prices fell through the floor. Once burned, lenders and investors are now reluctant to relive the nightmare of collapsing oil prices, insolvent borrowers and repossessed oil rigs.
“They are infinitely more cautious than they were 10 or 15 years ago,” investment banker Simmons said.
Events Monday showed dramatically how volatile oil prices are. Prices for the benchmark West Texas Intermediate crude, which soared to about $31 a barrel late last week, plunged $4 as fears eased about a Mideast war and oil-producing countries considered raising output.
Bank credit is tight anyway. In particular, banks are not aggressively trying to make energy loans as they once did, because of the risks. Indeed, energy lending is so tarnished that one Southland institution, City National Bank in Beverly Hills, runs radio ads boasting that it does not make energy loans.
Energy lenders as a group also are more conservative, if for no other reason than that the freewheeling lenders who bankrolled projects in the early 1980s are out of business, the most notorious being Penn Square Bank in Oklahoma City.
“The people who weren’t cautious in energy lending in the 1970s and 1980s aren’t in banking anymore. The institutions that survived had more conservative management,” said Stephen Brown, senior economist with the Federal Reserve Bank of Dallas.
Also, doctors, celebrities and other investors with no specialized knowledge of energy can no longer throw money at tax shelters tied to drilling ventures. Changes in federal law virtually wiped out those tax breaks, some of which were so generous that investors often didn’t much care whether oil was ever found.
Even as tensions in the Middle East grow, views toward financing ventures have yet to change much. For one thing, no one is convinced that higher oil prices--$27 Monday, compared to $16 at the start of the summer--are for real.
“There’s probably at least a $6-a-barrel premium compared to what prices would be if we didn’t have the Iraq-Kuwait issue. If there is some resolution to the situation, you’ll see that 6 bucks evaporate overnight,” said Chase Manhattan Bank Senior Vice President Robert Weaver.
Banks generally will make so-called production loans, those secured by proven oil and gas reserves. But they won’t touch some energy loans, such as those to finance purchase of drilling rigs.
“We’re not making rig loans. We have a rule not to do it,” said Gary Wright, manager of energy and chemicals for Chemical Bank in Houston. Funding for oil exploration ventures usually does not come from banks but from investors who gamble on earning a share of potential profits.
Big Oil is largely unaffected by current lending policies. To raise money, major oil companies do what many large industrial firms do: sell commercial paper, which is a corporate IOU. The largest oil service firms have been selling stock to raise money.
Smaller, independent oil producers and service companies have felt the crunch most. Robert Sterling, vice president of exploration and development for Nahama & Weagant Energy Co. in Bakersfield, said the firm has been discussing a possible $10-million credit line with lenders.
“We’ve found them to be extremely cautious,” he said. “And we don’t think this run-up in prices will cause them to change their long-term plans.”
Although the loose-money days of the 1980s are gone, lenders had been showing signs of making more money available for energy projects in the months leading up to the Mideast crisis. Some attribute this to rising prices during the past year and increasing confidence that they are heading up over the long term.
Samuel Atkins, executive vice president of the energy group for NCNB Texas in Dallas, said the bank’s energy loan portfolio was $3 billion June 30, up 25% from the start of the year. Likewise, the energy portfolio for banking competitor First City in Houston was $951 million June 30, nearly double the year-earlier level.
But banks overall have clearly reduced their activity in energy lending from the levels of a few years ago. Alfred F. Grove Jr., Bank of America senior vice president for energy worldwide, said the San Francisco bank’s portfolio of energy loans and credit lines totals $8 billion, down from $11.4 billion in 1985. Part of that reduction Grove attributes to the banking firm’s restructuring.
What concerns many experts is that it will take substantial amounts of money to revive the industry from its near-moribund condition. The number of oil rigs working in the United States--a key indicator of activity--is about 1,000. Although up from a year ago, the number is less than one-fourth the peak number of 4,500 rigs active in 1981. Substantial money will be needed to refurbish idle rigs, hire workers and crank up operations.
Lenders and oil executives all said big money will be made available for energy loans only after people are convinced that higher oil prices are here to stay. But with the lessons of the 1980s, they add, it will be a long time before anyone truly believes it.
