Banks that actively lend to the oil and natural gas sector are upbeat about strong commodity prices and rising production activity that necessitate new and expanded exploration and drilling projects – and financing to make it happen.

EIA

Some are reporting loan growth as a result. Others look for increased lending to develop as the year wears on.

At the same time, however, bankers are cautiously monitoring fragile U.S. and global economies amid festering overseas pandemic problems, supply chain challenges and Russia’s war in Ukraine. What’s more, like the companies they lend to, banks are trying to strike a delicate balance between meeting current energy needs with swelling demands from politicians and investors to shift capital expenditures to renewable fuels.

The U.S. econ­omy contracted at a 1.4% an­nual rate in the first quar­ter, the Com­merce De­part­ment said Thurs­day. It marked the first quarterly slump since the onset of the pandemic in 2020. The decline in gross domestic product marked a sudden pullback from the 6.9% annual growth rate posted for the fourth quarter.

The first quarter data do not fully capture the impacts of Russia’s invasion of Ukraine – launched in late February. Nor do they account for new lockdowns in China amid fresh virus outbreaks there and rising interest rates in the United States. These developments in March could prove detrimental to growth in the current quarter, economists said.

A resurgence of the coronavirus in China — where vaccines are reportedly not nearly as effective as Western vaccines — could reignite supply chain problems, exacerbate inflation that already is around a 40-year high and further challenge the U.S. economy, Federal Reserve economists have cautioned.

Globally, the International Monetary Fund said in its April World Economic Outlook that economic growth would slow this year to 3.6% from 6.1% in 2021.

Houston-based Prosperity Bancshares Chairman H. E. Timanus summed it up on an earning call this week. “Obviously, oil and gas right now is running contrary to all these fears. How long that lasts, we don’t know. But at $90 to $100/bbl, things are pretty good in the oilfield right now.”

Timanus said Prosperity’s overall loan portfolio has been held in check by paydowns from cash-flush companies reducing debt. However, loan demand from oil and gas producers is beginning to mount alongside new activity aimed at boosting output.

[Will U.S. natural gas production continue to rise? NGI’s Patrick Rau analyzes third quarter earnings reports to read the drilling and supply tea leaves and what they mean for natural gas prices looking ahead. Listen now.]

Prices, Production Up

Indeed, oil prices currently hover around $100/bbl amid supply shortage concerns caused by the war in Ukraine. Western sanctions against Russia, a major oil exporter, cut into global supplies.

Natural gas, meanwhile, has rallied throughout most of the conflict as European countries aggressively move to wean themselves from Russian supplies. European leaders are calling for exports from the United States and others in the West to fill the void. That demand has supported lofty prices, which bankers think will help drive rising production and energy company profits this year.

All this has, at least for the near term, begun to overshadow the push for renewable energy, bankers said.

Tulsa-based BOK Financial, for one, said it grew lending to oil and gas companies in the first quarter as well as the final three months of 2021. It looks for more expansion ahead.

“We are seeing growth” and “we’re seeing really strong opportunities,” CEO Stacy Kymes said on an earnings call. “I think you’ll see more drilling activity in the latter half of the year…and that’s part of the upside.”

U.S. crude production for the week ended April 22 – the most recent –  totaled 11.9 million b/d, according to Energy Information Administration (EIA). That was on par with the highest level to date this year. It marked a substantial increase from the level maintained through much of the first quarter, when output had held around 11.6 million b/d.

Oil output was also up about 1.0 million b/d from a year earlier.

Still, U.S. production remains more than 1.0 million b/d below pre-pandemic levels. Output had topped 13.0 million b/d in early 2020 before the coronavirus arrived in widespread form in the United States.

Aside from spring maintenance work that has recently hindered output levels, U.S. natural gas production also is on the rise. Domestic dry natural gas production should average 96.9 Bcf/d in April and 97.4 Bcf/d for full-year 2022, which would reflect a 3.8 Bcf/d increase over 2021 levels, EIA said in a forecast this month.

Against that backdrop, Comerica Inc., a large regional bank based in Dallas. also is optimistic about oil and gas lending this year.

“We feel really good about our energy portfolio that we have today,” Comerica’s Peter Sefzik, executive director, said on a recent earnings call. “It’s a business that we’ve been in for a long, long time. We plan to stay in it.”

Oil and gas lending may never return to its peak of the past decade, he said, but it is steady and increasing from pandemic lows. “We feel real good about the level that we’re at and plan to maintain that,” Sefzik said.

Striking A Balance

Longer term, however, Sefzik and other bankers are looking to help energy companies transition from fossil fuel production to renewables, such as solar and wind.

Federal policy is pushing for this, as are major institutional investors, with an emphasis on cleaner energy to combat climate change.

Three of the nation’s biggest banks in March – all of which lend into the energy sector – faced shareholder proposals at their annual meetings that called for aggressive reduction in fossil fuel lending.

The proposals at Citigroup Inc., Bank of America (BofA) and Wells Fargo & Co. were ultimately shot down by shareholders. Still, at least 11% of shareholders at each bank voted in favor – enough that each bank may face repeated calls at their annual meetings next year.

Similar proposals are slated in the coming weeks at the annual meetings of Wall Street giants JPMorgan Chase, Goldman Sachs and Morgan Stanley.

For now, megabank CEOs are walking a fine line, continuing to finance oil and gas but signaling that times are changing.

In public comments, Wells CEO Charlie Scharf said in April the bank is assisting companies “as they transition to a low-carbon future.” Echoing recent statements from BofA and Citigroup executives, he said energy clients need to continue to invest in fossil fuels to support near-term demand while they simultaneously lay the groundwork for an eventual future without oil and likely less gas.

Banks, Scharf said, should support that process rather than simply shun fossil fuels.

“We’ve favored engagement over divestment,” Scharf said.