Small oil and gas companies often rely own loans from banks to fund their production. Recently, however, some of the largest banks have cracked down on these loans. These monetary groups have become more cautious when it comes to funding oil and gas companies. Banks have become skeptical of the oil and gas staying as profitable in the future and don’t want to risk losing money.
This lack of funding has made things difficult for small oil and gas companies around the country. Many groups are already struggling due to other issues, such as a shortage of skilled workers and slowed long term and short term growth.
Several major banks slashed their estimated values for oil and gas companies’ reserves, including JPMorgan Chase, Wells Fargo, and Royal Bank of Canada. The estimated values of reserves are what banks base their reserved-based loans, or RBLs, on when determining how much money to lend an oil company. Although it is difficult to estimate the exact size of the RBL market, a few hundred companies take loans, altogether worth billions of dollars.
The prices of natural gas have fallen by about $0.50 per million British thermal units, which is a 20% drop from the levels in the spring of this year. Some groups believe that the industry will be seeing between a 15% and 30% reduction in loan sizes. As a result, oil prices may be $1 to $2 lower than the original spring predictions. Banks don’t want to invest too much in a shaky future, so they are dramatically reducing their loans to oil and gas groups.
These cuts in loans impact small companies the most. These groups are already having difficulty searching for financing such as stocks and bonds. Investors are often hesitant to invest after witnessing previous poor returns. The United States has become the world’s top oil and gas producer, but investors are expecting weak returns due to the low price of oil and gas.
Cuts to funding have the potential to slow down the growth of the country’s oil production, which could lead to future bankruptcies. Bankruptcy filings are already at the highest they’ve been since 2016, and the reduction in loans will likely only increase the number. Unfortunately, the future of small U.S. oil companies appears shaky. Without funding, it will be difficult for them to contribute to this vital industry.