Harbour Esplanade - Deteriorating Wharf. Artist’s Impression.
1 TRENDS IN ENERGY LENDING 7 August 2008. 2 3 FIRST QUARTER 2008 BANK INDUSTRY PERFORMANCE...
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Transcript of 1 TRENDS IN ENERGY LENDING 7 August 2008. 2 3 FIRST QUARTER 2008 BANK INDUSTRY PERFORMANCE...
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TRENDS IN ENERGY LENDING
7 August 2008
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FIRST QUARTER 2008 BANK INDUSTRY PERFORMANCE
• Deteriorating real estate portfolios – loan loss provisions 4 times 1st quarter 2007
• Shrinking profits - especially largest banks• Lower non-interest revenues: trading and loan sales• Charge-offs climbed to a five-year high• Past due loans increased 24% from 4th quarter 2007• Of banks that paid dividends, half were lowered
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REPERCUSSIONS
• Banks’ underwriting standards have tightened– Reasons: market liquidity/capital pressure,
economic outlook, risk appetite, loan performance and the financial condition of some banks.
– The impact of this tightening is seen in loan pricing, covenants, collateral, guarantor requirements, and equity requirements.
– Standards that have eased…..maturity and amortization.
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INDICATIONS OF STRESS
• Stock price of top 20 energy banks –
DOWN 29% LTM (vs. 9% down for DJA)
• Cost of external debt capital for banks – LIBOR + 300 bps (more for troubled banks)
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ENERGY SEGMENT – STILL DESIRABLE
Estimated Energy Loan Commitments - Largest Energy Banks
Bank 12/31/06 12/31/07
Citigroup $25 B $31 B
Bank of America $19 B $24 B
JP Morgan Chase $18 B $26 B
BNP Paribas* $ 8 B $14 B
Wachovia $ 6 B $ 7 B
• Includes impact of currency fluctuation
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IMPACT OF ENERGY PRICES
• Positive: Lender price decks are climbing – Median prices for oil and gas*
• 2008: $70.00/$7.00• 2009: $67.75/$6.75• 2010: $61.25/$6.50• 2011: $60.00/$6.25• 2012: $60.00/$6.15
• Negative: Calculated exposure for commodity hedges has ballooned due to price volatility - exacerbates capital allocation issues.
* Tristone Capital, Inc. Energy Lender Price Survey, Q3/08
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IMPACT OF BANKS’ STRESS ON ENERGY CLIENTS
• Certain formerly stout players in the lending market have scaled back both lending and hedging
• Very active secondary senior loan market• Push-back on stretch deals due to capital allocation issues• Lower hold limits on loans• Failed syndications• Fewer transactions fully underwritten • Structures becoming more conventional• Interest margin up +/- 25 bps; up-front fees higher
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OTHER…..
• Impact of new entrants in energy lending market uncertain.
• Semgroup bankruptcy – bad timing.
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OPPORTUNITIES
• For well-capitalized banks……get your phone calls returned.
• Improve position in credits at attractive prices.
• Enhanced cross-sell opportunities.
• Banks with hedging capacity desired.
• Rewards for stepping up: sharing of bond economics and equity issuance fees.
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FUTURE
• Some old names will exit/merge/go away.
• Competition will be somewhat abated.
• More banks per credit facility.
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QUESTIONS
• Will banks’ capital crunch slow down oil and gas acquisitions?
• Where does it end?
• Who will be left?
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