JP Morgan Chase & Co. increases oil and gas loan loss reserves by 61%
JP Morgan Chase & Co. plans to increase its reserves to cover potential oil and gas loan losses by 61% this quarter, reports Reuters. The bank plans to set aside $500 million on top of the $815 million already in place to protect against loan loss in the oil and gas sector.
If oil prices remain at $25 per barrel for 18 months, the bank said it would have to set aside an additional $1.5 billion in reserves, 145% more than it currently has in place, in order to protect against losses in an even more stressed price environment than the one seen today.
Goldman Sachs says 40% of oil and gas lending is to junk-rated firms
In its annual regulatory filing, Goldman Sachs said of the $10.6 billion the bank holds in oil and gas related loans and lending commitments, $4.2 billion is to “non-investment-grade counterparties.” Of that $4.2 billion, $1.5 billion is related to loans and $2.7 billion is related to lending commitments, Goldman Sachs said in the filing.
The bank’s exposure jumps another $1.9 billion including derivatives and receivables with oil and gas companies, but those are “primarily with investment-grade counterparties.”
Many are concerned that a rash of bankruptcies that never came in 2015 may be unleashed in the coming months as oil and gas companies go into debt redetermination. In North Dakota alone, five or six companies may face bankruptcy when their debt redetermination comes in June, according to North Dakota Director of the Department of Mineral Resources Lynn Helms.
“There’s a chance that these companies can hang on for a few more weeks or months. If prices turn around, they might be alright, but if not, they’ll likely go bankrupt.”
With oil prices dropping lower today on news from Saudi Arabian Oil Minister Ali al-Naimi that the kingdom does not in fact plan to cut production, as rumors had been projecting, it seems unlikely that prices will recover in the near future. What other companies may go under in the coming months remains to be seen, but it appears the banks are increasing their financial buffers for when the time comes.
