Sign Up for FREE Daily Energy News
Canadian Flag CDN NEWS  |  US Flag US NEWS  | TIMELY. FOCUSED. RELEVANT. FREE
  • Stay Connected
  • linkedin
  • twitter
  • facebook
  • youtube2
BREAKING NEWS:

Hazloc Heaters
Copper Tip Energy Services
Copper Tip Energy
Hazloc Heaters


Bankers Ratcheting Up Oil Deals Drive Deepening Market Split


These translations are done via Google Translate
  • Texas Capital ranks among banks making biggest inroads
  • Banks are spreading risk through new syndication models

A number of US and Canadian regional banks are rapidly expanding their presence in the market for oil, gas and coal dealmaking, in a move that promises to redraw the map for the financing of fossil fuels.

Among those making the biggest gains during the past 2 1/2 years is Texas Capital Bank, according to data compiled by Bloomberg. Other banks doing significantly more fossil-fuel deals include Truist Securities Inc., FHN Financial, Cadence Bank, BOK Financial Corp. and Canadian Western Bank, the data show. The companies have climbed between 17 and 46 steps up the league table since the end of 2021, and now rank among the world’s top 50 lenders measured by the number of oil, gas and coal transactions.

Marc Graham, head of energy at Texas Capital, says it’s like being on a “treadmill” where the goal is “to constantly be adding new clients” in the oil and gas sector. He points to a retreat by European banks, including UBS Group AG and ABN Amro Bank NV, as a development that’s changing the competitive landscape.

“We don’t compete against European banks anymore,” Graham said in an interview.

It’s a picture that’s playing out across regional banks in North America. Driving the development is the regulatory backdrop, with climate rules leading Europe’s biggest banks to step back from oil, gas and coal clients for services ranging from lending to bond underwriting and even trade finance. For now, the evidence suggests fossil-fuel companies are having little difficulty finding new sources of finance.

A spokesperson for ABN Amro said “we recognize the trend,” in an emailed response to questions. UBS declined to comment.

Spokespeople for FHN Financial, Truist and Cadence declined to comment. Canadian Western didn’t respond to a request for comment.

Marisol Salazar, senior vice president and manager for energy banking at BOK Financial, said regional banks are “active and hungry” for new fossil-fuel deals. Both Salazar and Graham also cited a period of consolidation in the US oil and gas sector that’s spurred client and deal turnover. Meanwhile, declining interest rates are also feeding demand for credit, with companies now able to access capital at rates of 6% to 8%, Salazar said.

Changing Ranks

Texas Capital has climbed 46 steps by number of deals in the fossil-fuel loans league table.

Source: BloombergNote: Table shows biggest changes in rank by number of fossil-fuel loan deals since 2022, compared with the 2016 to 2021 period.

The rise of North American regional banks in the financing of fossil fuels represents a “serious change for the industry,” Max Falkenberg, visiting research fellow at University College London’s Institute for Sustainable Resources, said in an interview.

Falkenberg, who’s studied bank networks in the market for syndicated loans to fossil-fuel companies, says the development is unsettling because these banks generally aren’t subject to the same prudential regulations as their larger, systemically important peers.

“The more we see this decentralization of the sector away from the largest banks towards small banks, it’ll just become harder and harder to prevent this substitution of capital when a bank decides to exit the sector,” he said.

The European Union’s biggest bank, BNP Paribas SA, and ING Groep NV, the largest lender in the Netherlands, are among firms cutting back on their fossil-fuel exposures. The banks, which are both fighting lawsuits brought by climate nonprofits, are among lenders that have dropped furthest down the league table for oil, gas and coal deals since the beginning of 2022, the Bloomberg data show.

ROO.AI Oil and Gas Field Service Software
GLJ

On Wall Street, meanwhile, the financing of fossil fuels continues to be big business for the largest lenders. Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. are all among the top providers of loans for the sector since 2022, according to Bloomberg data.

There’s also evidence that fossil-fuel clients are increasingly gaining access to financing outside the banking sector. In some cases, banks themselves are helping establish connections with alternative financing sources for clients via arrangements that help them maintain ties and even generate new fee streams.

Graham says Texas Capital is in the process of building out such a model, and has added 10 investment bankers to its team of 12 corporate finance employees.

“We’ll use the bank’s balance sheet to facilitate acquisitions, but then we educate clients on all the other sources of capital that are available to them,” he said. Those sources include private-credit term loans and publicly traded debt, as well as public and private equity, he said.

To be sure, such credit arrangements tend to cost clients more. “They price a lot differently” to bank loans, Graham said. In exchange, clients get “a more patient source of capital,” he said.

Other models for getting capital to fossil-fuel clients include securitization structures usually reserved for mortgage bonds.

“It’s the same investors, it’s the same kind of structure,” Graham said. But instead of using homes as collateral, it’s now oil and gas wells, he said.

A fresh study co-authored by Falkenberg shows that several large Japanese and Canadian banks, including Scotiabank, BMO Capital Markets, Sumitomo Mitsui Financial Group Inc., Mitsubishi UFJ Financial Group Inc. and Mizuho Bank Ltd., have increased their average annual lending to fossil-fuel clients, based on data spanning 2010 to 2016 and 2017 to 2021.

The study, published in the journal Nature Communications on Tuesday, found no evidence of an overall decline in fossil-fuel lending since the Paris Agreement was signed in 2016, due in part to the “phenomenon of finance substitution,” the authors wrote.

And while JPMorgan, Citigroup Inc., Wells Fargo and BofA cut their overall exposure to the sector during the same period, their “centrality in the deal-syndication network continues to increase,” the authors said. That’s as loans to the energy sector have “become increasingly syndicated” in their structure over the past 10 to 15 years, Falkenberg said.

A Diverse Capital Base

Just 18% of oil and gas producers are expected to use bank loans as a primary means of funding this year.

Source: Haynes Boone survey of 306 company executives, April 2024Note: ‘Other’ includes debt from capital markets (8%), joint ventures with PE firms (7%), monetization transactions (7%), equity from capital markets (4%) and ‘other’ (1%).

The setup makes it easier for big banks with strict capital requirements to spread risk and keep participating in deals they might otherwise have to turn down, Falkenberg said.

Ultimately, “if European banks pull out without global regulations to limit the substitution effect, there’s going to be very, very little positive impact at the project level,” Falkenberg said.



Share This:



More News Articles


GET ENERGYNOW’S DAILY EMAIL FOR FREE