Banks Much Deeper in the Hole on Oil & Gas Collateral than they Pretend

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“All of it is in the gutter.”

An asset is ultimately worth what a buyer is willing and able to pay for it. That price turns out to be terribly low for oil and gas assets. This is a big problem for banks, which used these assets as collateral for energy loans they extended during boom years — a much bigger problem than suggested by the current spate of puny additions to loan loss reserves.

Natural gas driller Quicksilver Resources, which filed for Chapter 11 in March last year, sent an email to its remaining employees Friday night at 11 p.m. to announce the sale of all of its US oil & gas assets, the Fort Worth Star Telegram‎ reported. Saturday morning, it filed the documents in bankruptcy court in Delaware. The judge has to approve the deal.

The price it got for its US assets is an eye-opener.

The company, which is based in Fort Worth, TX, also owns some assets in Canada which it will try to sell separately. But they’re not included in the bankruptcy. When it filed for bankruptcy, it listed $2.35 billion in debts and only $1.21 billion in assets. “The rest was drilled into the ground to never be seen again,” I wrote at the time.

Only it’s a lot worse. All it got for its US assets was a paltry $245 million.

The proceeds from those sales — what’s left after lawyers and restructuring advisors get their cut — are going to be handed to the creditors. Tiny scraps to cover $2.35 billion in debts.

“This sale maximizes value for the benefit of our creditors in the face of difficult market conditions,” explained Quicksilver CEO Glenn Darden in a statement released Saturday.

The auction, originally scheduled for December but postponed due to the chaos in the oil and gas markets, was held last Wednesday. The buyer was BlueStone Natural Resources II, based in Tulsa, OK. It was formed in 2012 backed by Natural Gas Partners, a PE firm in Irving, TX. BlueStone has completed over 30 acquisitions of oil and gas assets in Texas with over 800 wells.

“The acreage is good, but under the current commodity price nobody can make any money,” Ross Craft, CEO of Fort Worth based Approach Resources, told the Star Telegram. His company had been approached last year about acquiring Quicksilver. “All of it is in the gutter,” he said.

Due to the “disequilibrium in the market,” it’s difficult to find a price buyers were willing to pay and creditors were willing to accept, the Star Telegram reported, citing “industry observers.”



Adam Dunayer, managing director at Houlihan Lokey, the investment bank and restructuring advisor involved in marketing the assets, explained it this way: “They were the highest and best bidder that participated in the process. We went out to hundreds of buyers, and they were the last one standing.”

Among Quicksilver’s $2.35 billion in debts, are $1.098 billion in secured debts, composed of a first-lien revolving credit line of about $273 million, a second-lien $625 million term loan, and second-lien notes of about $200 million. The rest is unsecured. So Quicksilver’s collateral to secure about $1.1 billion in debt is now worth $245 million.

And this is where it gets tricky for banks. Quicksilver is just one in many over-indebted companies in the oil and gas sector that have been waylaid by the collapse in the prices of oil and natural gas.

While bond holders have been bloodied for over a year, banks have just now started to officially grapple with this on their financial statements. For the first time since Q4 2009, the big four banks – JP Morgen, Citigroup, Bank of America, and Wells Fargo – have added to their loan-loss reserves when they reported Q4 earnings. The biggest one, JP Morgan added only $124 million to its loan-loss reserves to cover expected future losses on its oil and gas loans. A minuscule amount, given the size of JP Morgan’s energy loan book [read… Chilling Thing Jamie Dimon just Said about the Economy].

During the earnings call, CEO Jamie Dimon came under attack over that $124 million: wasn’t it way too small to cover potential losses? But he remained sanguine and raved about how the cost “to get the oil out of the ground has also dropped dramatically.” And then he said this:

“We’re not worried about the big oil companies. These are mostly the smaller ones that you’re talking about.”

“These are asset backed loans. A bankruptcy doesn’t necessarily mean your loan is bad; you have to be a little bit careful.”

Quicksilver’s loans are asset-backed too. But the value of those assets, when an actual buyer had to be found, shrank to a small fraction of the amount of the loans. And yet Dimon soldiered on:

“There is also a philosophical thing. A bank is supposed to be there for clients in good times and bad times…. So then, if we can responsibly support clients we are going to. And if we lose a little bit more money, so be it. We’ve done that around the world. We did it in 2007, 2008 and 2009. We tried to do responsibly. If banks just completely pull out of markets every time something gets volatile and scary, you’ll be sinking companies left and right.”

And he’s right: banks need to be there for their clients when things get tough. But in 2008 and 2009, the years he mentioned, the banks were bailed out by the Fed and the Treasury in the US and by other entities in other countries.

Quicksilver’s secured creditors are now finding out what it means to lose “a little bit of money” on their asset-backed loans. But JP Morgan doesn’t want investors to find out what that “little bit of money” could mean for its own oil & gas loan book and earnings. So it will do what it can to delay the moment of truth.

“Extend and pretend,” as it’s called, still rules the day. The fact that it took a year-and-a-half of this terrible oil bust before big banks made the first additions to energy loan loss reserves shows how parsimonious big banks are in serving up a sense of reality.

Turns out, according to Moody’s, “Some very critical things are hidden.” Read…  This is Why Junk Bonds Will Sink Stocks: Moody’s



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  46 comments for “Banks Much Deeper in the Hole on Oil & Gas Collateral than they Pretend

  1. Vespa P200E
    January 25, 2016 at 2:20 pm

    Of course the greedy banksters are in deeper trouble but no worries as they WILL be another bailout as banksters’ profits are privatized and losses are borne by the tax payers.

    So they get NIRP money from the Fed and screws the middle class with double digit car and credit car loans, and of course juicier return by loaning ZIRP money to the drillers with depreciating collaterals. Nevertheless, banksters will 1 way or another made whole on their losses…

    • January 25, 2016 at 2:51 pm

      I just don’t see how another bailout is in the cards. With Bernie hammering Wall St. and dragging Hillary somewhat leftward I can’t see how the banks will get relief from the Dems. The real reason the Tea Party formed was in opposition to the bailouts until the Kochs and others brilliantly co-opted that movement into something else entirely. I believe that anti bankster sentiment is still lurking just below the surface which might explain why Trump’s numbers took their biggest jump when he said he would tax Wall St. I thought for sure that position was a fatal mistake on his part but I as wrong. Like the old song: “Something is happening here and it ain’t exactly clear”.

      • Dan Romig
        January 25, 2016 at 3:28 pm

        Please take a look at today’s http://www.wallstreetonparade.com to see how TPTB on Wall Street are backing Ms. Clinton.

        • January 25, 2016 at 3:40 pm

          Clinton says she wants to repeal Citizens United but fought for UBS against the IRS while Sec. of State and then the Clinton foundation miraculously gets 1.5 million from UBS. Quid pro quo. Still, I don’t see how anyone could get a bailout deal through Congress with 2008 so fresh in everyone’s mind and daily reminders of the banksters excesses. I’m a Bernie volunteer in our retirement park and if it comes down to Hillary I’ll vote Green.

        • Vespa P200E
          January 25, 2016 at 4:24 pm

          Whoa – Hilary collected cool $2 mil in less than 7 months after fleeing her joke position in the State dept who managed to alienate the allies, cozy up to the enemies (i.e., reset attempt with Russia) and thru Israel under the bus.

          From NYT recently:
          For a fee of $275,000, she had agreed to appear before the clients of GoldenTree Asset Management, the capstone of a lucrative speechmaking sprint through Wall Street that earned her more than $2 million in less than seven months.

          Goldman Sachs alone paid Mrs. Clinton $675,000 for three speeches in three different states, a fact Mr. Sanders has highlighted repeatedly.

          http://www.nytimes.com/2016/01/22/us/politics/in-race-defined-by-income-gap-hillary-clintons-wall-street-ties-incite-rivals.html

      • Vespa P200E
        January 25, 2016 at 4:13 pm

        I agree with you in principle BUT the politicians will do what their bankster handlers with unlimited political donations will direct them to do…

        OBozo collected almost a $1 mil from Government Sacks for the 2008 election alone and GS has paid Hillary $750k in 3 speaking “bribes”. OBozo had few private suppers in WH with Jamie and LLoyd back in 2009/10 but there must have been some kind of bromance fall out as no private get together since 2010.

      • Mick
        January 25, 2016 at 4:19 pm

        That’s right. There’ll be no bailout, no new QE, no nothing.
        This is the grand finale end of all things and big banks know it.
        They’re purposefully making this as bad as possible because all derivative losses have already been legislated to be eaten by the US govt.

        You’re about to watch the entire nation go down in one gigantic debt bomb.

        • West
          January 25, 2016 at 5:19 pm

          If only you were right about the bailouts. More than big banks took bailouts though. Numerous homeowners walked away from loans and got forgiveness on their taxes for unearned income.

          The whole oil/gas and banking sector will get tax relief (implicit bailout) if not outright cash in the coffers when times get tight. Mom and pop main street will have their savings reduced through inflation and lack of interest income, at the best, and through NIRP and confiscation at the worst. They’ll complain, and then vote for the same people again, as long as there is food in the freezer and cable TV it’s easy to look the other way.

        • January 25, 2016 at 6:35 pm

          Mick, the debt bomb now includes the whole world. In past times OPEC would cut production to get prices up but the debt load is now so great they have to keep pumping until everything finally pops.

      • Ptb
        January 25, 2016 at 6:26 pm

        I think you’ve hit upon what the media will not state very plainly, but everyone knows….any politician that takes money from wall street is bought and paid for. And thus the attraction to Trump and Sanders.

        • January 25, 2016 at 6:46 pm

          Ptb, I think you are exactly right. The reason Sanders says he can appeal to Trump supporters is because those two are the only ones who have attacked Wall Street. Hillary has done a little “me too” but no one trusts anything she says. Too many rich speaking fees from the banks and videos attacking homeowners who got burned in 2008

  2. Spencer
    January 25, 2016 at 3:13 pm

    But then again

    …”Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief…It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. – William White, former BIS chief economist “…

    and …”stay thirsty my friends”…, beer and gold.

  3. Lee
    January 25, 2016 at 4:11 pm

    For those with deep pockets and a 10 year time frame or more there are huge opportunities in the sector.

    Just as in any financial crisis there are going to those that pick up these kinds of distressed assets at bargain basement prices that will make millions on the rebound.

  4. Ptb
    January 25, 2016 at 4:43 pm

    It can also be worth what the Fed is willing to buy them for.

  5. rich
    January 25, 2016 at 4:44 pm

    “The proceeds from those sales — what’s left after lawyers and restructuring advisors get their cut — are going to be handed to the creditors.”

    And just who are the creditor’s creditors, and what, if anything, will be handed to them? Like with unwinding derivatives, it’s not always easy to identify just who is at the end of these opm daisy chains.

    • January 25, 2016 at 6:40 pm

      The largest creditors were listed in the bankruptcy filing (from my article at the time):

      The Wilmington Trust National Association ($361.6 million), Delaware Trust Co. ($332.6 million), US Bank National Association ($312.7 million), and several pipeline companies, including Oasis Pipeline and Energy Transfer Fuel.

      But defaulted assets are sold all the time, so it wouldn’t surprise me if some of these entities have changed. This info can be dug up in the bankruptcy documents.

  6. Jonas
    January 25, 2016 at 5:16 pm

    I’m intimately familiar with the battery industry, and am giving it serious odds that the price of oil NEVER recovers. The reason isn’t tesla’s gigafactory which will just make more expensive thin film lithium ion batteries. It is the battery research being done on a grand scale around the world.

    Some interesting facts: current batteries hold up to 250Wh/kg. The theoretical lithium oxygen upper limit is 4500Wh/kg, which goes to 11000Wh/kg with external oxygen. Research on many much more powerful and cheaper batteries is really coming to fruition around the world.

    There are more factors which make me think that the era of thin film lithium will soon be over, but it would take to long to list here. Suffice it to say that with batteries an order of magnitude cheaper, oil won’t be needed any more. With cheap batteries, EVS could drop in price to cost no more than a few thousand $, while handily beating ICE cats on every metric.

    Similar revolutions have happened many times before (DC electricity, cars, plastics, etc). If new tech comes out this year, oil may never rise above 60 again, then trend to zero. It’s a chance (I give it 30%) that to many are simply not aware of.

    • Nicko
      January 25, 2016 at 5:59 pm

      Care to name which companies have the most promising R&D? ;)

    • nick kelly
      January 25, 2016 at 6:26 pm

      Your similar revolutions have nothing in common with your apparent topic- the ever awaited battery breakthrough,
      Cars? That was a fifty year evolution with no particular breakthrough, starting with Gottlieb Daimler’s motorized tricycle (1890?)
      Sorry but if you know about the next big thing in batteries ( or fusion) just buy the stock.

      • Jonas
        January 25, 2016 at 10:47 pm

        Hah! Nick, Your skepticism of new battery breakthroughs, while correct for the last 20 years, may also now blind you to new developments coming online. After the first iphone, research has really accelerated. In the last two years especially, journals have published this party confirmed research of tech that’s built with common, cheap materials and is much better.

        @nicko: I’m not aware of any stock ticker (public company) with a disclosed worthwhile invention. My method right now is to read through the literature and get in contact with teams or private companies pursuing new tech. I’m almost certain I want to invest with a team which has developed an organic lithium cathode material, and a sodium cell maker. Both are just entering the VC circuit, something to which I’m new myself. Good luck!

        • nick kelly
          January 26, 2016 at 4:06 pm

          We agree on one thing- a big breakthrough in battery storage say 10 times for example would be a game changer maybe as big in a way as the internal combustion engine.
          So if any of a few dozen big players- Musk, Ford, Apple etc., etc., gets the idea there IS a breakthrough in sight- they aren’t going to dick around. They are going to pick a team and say here is 10, 20 or a hundred million – go to it!
          This applies in spades to Musk who, if there is a breakthrough, is currently building one of the world’s largest white elephants.
          To me it also doesn’t make sense that a small outfit or team that thought it had a breakthrough would just publish openly- why not patent it?

        • valuationguy
          January 26, 2016 at 4:41 pm

          While I don’t disagree that batteries will continue to improve in THEORETICAL energy density and prototypes will no doubt be manufactured….the primary breakthrough that is going to be needed is regarding the SAFETY surrounding high energy density storage.

          The higher the energy density….the bigger the safety and stability problems.

          Everyone in the industry has already see the burned out husks of several TESLA cars where the battery erupted…..or see the warnings against taking lithium ion batteries over a certain size on airplanes (due to the hazards of fire or explosion). It doesn’t take but a few instances where Q/A is bad for their to be a outsized regulatory response…especially if someone gets hurt.

          Anyone want a cellphone that melts in your pocket due to a faulty battery?

  7. LG
    January 25, 2016 at 6:37 pm

    They’ll just inflate the cost of petroleum based goods. There it’s fixed.

  8. ERG
    January 25, 2016 at 9:25 pm

    Batteries? Batteries are a transfer mechanism for energy and NOT a SOURCE of energy.

    Q: Where will the energy that will be stored in these wonderful batteries come from?

    A: **cough** OIL

    • lucky strike
      January 25, 2016 at 10:00 pm

      cough- solar, nuclear, geothermal.

      The point is that if batteries can store a 100x-1000x their current limits it allows people to move homes ‘off the grid’. It allows cars to go thousands of miles on a single charge- hence charging stations will blossom like … dandelions?

      It means it might be worth it to charge a battery at a nuclear plant then ship it to someone’s home (for several months worth of energy).

      • d
        January 28, 2016 at 7:00 am

        If they can produce a battery, economically, holding that sort of energy volume, the pressure will go on solar, water, and wind, to up their tech. BIG TIME. the wind may not always blow but the tide moves 18 hrs a day on average, the technology’s are very similar

        As it makes off grid residences, and mobile residences, independent and potentially energy self sufficient.

        • January 29, 2016 at 11:08 am

          Why stop at 18 hrs? This tech uses ocean currents and can generate 24/7.

          vortexpowerdrive

        • d
          January 29, 2016 at 7:10 pm

          “Why stop at 18 hrs? This tech uses ocean currents and can generate 24/7.

          vortexpowerdrive”

          You put the drives in “Tidal zones”.

          There are slack water/low movement periods, as the tides change direction.

          So the average good drive is, 18hrs day.

          I have a windmill converted to drive underwater, that’s what it does when the boat is moored.

  9. January 25, 2016 at 10:26 pm

    I read that the banks are hesitant to mark to market. I’m scratching my head… I’m sure I’ve heard of this happening before (2oo8) but I can’t for the life of me (subprime) recall where I heard of this (2oo8) .

    Oh well! I’m sure it will come to me…

  10. yarrrrrr
    January 25, 2016 at 10:41 pm

    let’s see…Samson resources appears to be tracking Quicksilver…and the largest creditor is….why, furl me sails, it’s Capn Morgan! He will need a lot more booty in the reserve chest now……YARRRR!

    • night-train
      January 26, 2016 at 3:48 am

      Arrrgg. Ye be right matey. But, don’t underestimate Cap Morgan. He be a slippery one. Yo ho ho.

      I’ll bet truckloads of cash, party ladies, and Peruvian marching powder are flooding into Congress as we comment here. I hope my skepticism doesn’t put anyone off. It’s just that the political season brings out the negativity in me. Good day all.

      • chris Hauser
        January 26, 2016 at 9:34 pm

        bunch of squares up there, they just like power, no fun at all.

  11. Baboo
    January 26, 2016 at 1:36 am

    The U.S. might save the day: they’ve agreed to sell their strategic oil reserves to raise money. They’re selling into weakness because they need the money and fracking wells can take the place of the reserves. Insert bugle fanfare here.

  12. Oliver
    January 26, 2016 at 2:52 am

    Surely, the Government isn´t just going to stand by and watch.

    I posit that we´re going to see an attempt to bail out Oil & Gas by the Government … they´ll declare it a “strategic” sector, essential to “national security” and they´ll point to 2008 to tell the public “We can let that type of (bank)- collapse happen again.” Yup, sounds good, Government we´re on it.

    The FED will provide liquidity to the banks sitting on toxic debt by buying up distressed paper.

    Mind you, this isn´t your tired old Draghi type of QE ZIRCH, No it takes QE to another level: the FED or the government will start making debt and interest payments to distressed bond holders. Hey, voila, distressed paper trading at par, with no arrears for the banks to reserve against – the Government is finally doing its job. Yay !

    In addition, the government might propose to make an open-ended additon to the Strategic Petroleum reserve – at current interest rates it´s almost a free lunch. The government would commit to mopping up excess inventory for however long as necessary. And what a bargain for the tax payer: “Look, we´re buying oil at rock bottom prices !” Nobody will be able to argue with that. Go, Government, go !

    So there you go: financial bleeding stopped by QE(NG) – I´ll call it QE Next Generation, i.e.: the “direct” purchase of non-investment grade paper by the FED – as opposed to the FED buying treasury paper created from government bailouts), and a floor under the oil price by buying up surplus production until OPEC comes to their senses. Yeah, it´s a gimmick, but Government, you´re a genius !!

    There you go Wolf: problems solved, or at least contained.

    And shorts beware.

    Note: I´m not an expert on oil markets, and I´m sure it shows. I´m just commenting directionally, based on what has occurred in the past.

  13. Bead Blonde
    January 26, 2016 at 8:12 am

    Bailout tactic is so easy. Congress resists, stock market panic, voila, bailout! How it went down last time, how it goes down this time. It seems to be a foolproof method.

  14. nick kelly
    January 26, 2016 at 8:26 am

    This reminds me of a post I saw a few days ago- maybe on Wolf S, about the Fed telling banks not to push frackers etc. into bankruptcy but instead to insist on ‘asset sales’
    This was absurd on two levels- first who doesn’t try to sell assets before declaring bankruptcy? Even without being told to do so? It’s on page one of the survival guide.
    Second: as Herr Richter points out- they don’t have any assets- an asset by definition ( I think) having value. They can’t make money off their land at these prices or near them and neither can anyone else.
    So either the FED is offering meaningless advice or there is another message- like maybe- ‘look, don’t rock the boat right now because our lousy quarter of a percent hike seems to have coincided with a crash, and we don’t want any more straw on the camel’s back’
    Extend and pretend.
    To which the banks should reply; will you share our pain?

    • chris Hauser
      January 26, 2016 at 9:36 pm

      asset sales were working fine as long as snapback was a hope. doesn’t look that way, now.

      problem with bankruptcies is it fucks up the strong with the weak.

      witness ford with gm and chrysler.

  15. ERG
    January 26, 2016 at 8:58 am

    Solar? What do you do when the Sun isn’t out?

    Nuclear? Every heard of BANANA? Build Absolutely Nothing Anywhere Near Anyone. Now we have NOPE – Not On Planet Earth.

    Geothermal? Fine if you live in Iceland.

    Batteries store energy with a significant drop in overall system efficiency meaning it is necessary to produce even more electric power to keep things moving. What SOURCES of fuel are used to make electric power? Coal, natural gas, oil, and nuclear.

    I admire your optimism, but we’ll be running on the above sources of energy for a long time.

  16. Smitty
    January 26, 2016 at 3:12 pm

    Abengoa losses, last estimate $20 + billion and that’s with state “protection” for all their job killing fraud, imagine if energy markets were liberalized with no firehose of subsidy to the “connected”. Prediction Abengoa losses will top 40 billion and dwarf conventional energy losses for decades.

  17. Kevin Beck
    January 27, 2016 at 6:53 pm

    “The rest was drilled into the ground, never to be seen again.”

    That reminds me of the Penn Central bankruptcy in the 1970’s. Among their “assets” were unfinished tunnels with some railroad tracks possibly leading up to one side of the mountain.

    Such “assets” are valued on their books at what the cost expended to drill the hole was, yet they have no economic value before they are completed. Just like a hole in the ground isn’t worth anything to an oil & gas company until product starts to flow out of it.

    • January 27, 2016 at 9:11 pm

      I can’t get to this. It seems I need to sign in … can you make this available in some other way?

        • Peepot
          January 27, 2016 at 9:54 pm

          I was initially trying to link to the source at Douglas Westwood research….

        • January 27, 2016 at 10:17 pm

          Thanks!!

        • Peepot
          January 28, 2016 at 12:32 am

          It has been my understanding that unless an oil major is growing it’s reserves that it will soon be out of business…

          It appears that they have thrown in the towel – the low hanging fruit (cheap to extract oil) has pretty much all been found…

          What remains is not worth extracting with prices at these levels.

          So they are to a certain extent have stopped exploring for new oil.

          If there is a miraculous recovery in the economy at some point — demand for oil will rip higher — but because exploration has fallen off dramatically – and we cannot suddenly ramp up to meet the demand because the reserves will not even been found yet.

          The $147 price tag that hit just before the 2008 crisis (and which triggered the crisis) will no doubt look cheap.

          The global economy can function only if it has a growing supply of cheap oil.

          Houston…. Riyadh… Baghdad … Moscow >>>> we have a problem….

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