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Tariq Siddiqui's picture
COO Upstream EP Advisors LLC

Oil & Energy | Business Development | Capital Projects | Offshore Wind - Proven leader in offshore development and operations, with 25+ years’ expertise in managing business through cycles of...

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  • Jul 19, 2021 9:17 pm GMT
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Wall Street banks were on their way out of a long-term relationship with the oil industry. Now, with oil prices over $70 for the first time in three years, big bond buyers are snapping up oil bonds once again. 

KEY INSIGHTS

The 2014 oil price collapse, in hindsight, may have been the last “normal” crisis. Oil prices fell, funding dried up, supply tightened, prices went up, banks were willing to lend again, and producers poured the money into boosting production.

What is difference this time?

  1. Wall Street was buying bonds from non-investment-grade U.S. energy companies, which took advantage of record low interest rates to raise some $34 billion in fresh debt in the first half of the year.
  2. The current loans, come with the condition of not boosting output (No new wells).
  3. Bond buyers “want to see companies repairing their balance sheets (debt reduction) and delivering to creditors and shareholders rather than plowing money into new wells.”
  4. Production restraint, then, is paying off in more than one way. On the one hand, it has kept prices higher
  5. The U.S. shale oil industry after the worst of the pandemic appears to have become leaner, again, but also healthier in terms of balance sheet strength. Higher prices are making banks more willing to lend to oil companies again.
  6. Bank shareholders may be concerned about the environment, but they certainly would be more concerned about their dividend—and part of that comes from income made from lending to oil. And the higher oil prices go, the more willing banks will be to lend to those that produce it. 
  7. The shareholders of these companies are finally being made happy with the new prioritization of returns and debt repayment.
  8. The long-term sustainability of these returns however, still depend on ESG credentials. Investors must remain aware of the risks

BOTTOMLINE

The energy transition push has really gathered pace and banks have more than one reason to not be so willing to lend to the oil industry. But it is also a simple example of the basic principle of how markets work: if there is money to be made from something, money will be made from that something, regardless of its reputational standing in the public eye.  

 

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