Oil and Gas Lending
On March 16, 2016, the Office of the Comptroller of the Currency (OCC) released OCC Bulletin 2016-9, Oil and Gas Exploration and Production Lending. This replaces the previous examination booklet and provides guidance on risks inherent in lending to upstream oil and gas exploration and production companies and provides supervisory guidance on prudent risk management of this activity. While that booklet focuses on E&P lending, banks may find the guidance on Assigning Regulatory Loan Ratings somewhat useful for downstream and oil and gas service businesses as well.
Asset quality for energy companies and banks that serve them is under scrutiny. Given the increased risk related to the low oil prices, many banks have increased provisions related to oil and gas loans. Some banks have indicated they would provide even more if the accounting rules would allow. Bank examiners have been conducting reviews, including shared national credit reviews, targeting oil and gas. It seems the bankers and regulators are taking the appropriate actions, but people are watching and we cannot afford to get this one wrong.
Understanding the nature of energy relationships and following the supervisory guidance is important, of course. But banks should also identify relationships dependent on, or related to, energy businesses, including commercial real estate, construction and development and even consumer loans in areas where employment could be significantly impacted by a prolonged downturn. Bankers also should understand their customers’ hedging practices as part of assessing overall credit risk.
The banking industry generally deems energy risk as manageable, given adequate bank capital levels and diversity of revenues. Oil and gas loans for the largest banks and most community banks are a small percentage of capital. Banks with larger concentrations of energy loans are generally more sophisticated in their risk management practices – employing stress testing, engineering and other measures to mitigate risk. Private equity and alternative funding sources are coming into the mix, requiring banks to be at their best in order to compete and meet supervisory expectations.
Since there is not much good news related to oil and gas, maybe it helps to focus on the people. There is no successful industry, company, bank, credit union or accounting firm without good people, doing their best. We extend our thoughts and prayers to the many people impacted by downturn directly or indirectly, with confidence that the industry will once again prosper because of your efforts. We have received many calls from people in the energy business and HoganTaylor’s Energy practice is prepared to help in any way we can.