The loans that banks have made to energy companies grabbed a lot of investors' attention this week as lenders said they have boosted cash reserves to deal with bad oil and gas debt. But those financial institutions may have trouble bringing the hammer down on drillers.
The continuing slide in energy prices poses a dilemma for banks: cut energy clients' borrowing ability and risk sending them over the edge, or continue to accommodate them in order to prevent defaults. While some worry banks are already in too deep, lenders are loathe to see drillers fall into bankruptcy, leaving them holding the drillers' assets.
"Once they pull the plug on them, it will be dead property," Oppenheimer analyst Fadel Gheit said. "They have to handle it very carefully, and so far they have basically extended the life of these companies."
Indeed, banks reduced the drillers' borrowing bases less than many analysts expected during twice-a-year reviews in April and October of 2015. Those bases are determined by the value of drillers' assets, which in turn depends on the price of oil.