Banks tighten funding pipeline to energy companies

Crunch time for drillers

Bank lenders are curbing the amount of money they supply to energy companies amid an ongoing swoon in the price of crude oil.

In recent months, lenders Citigroup, JPMorgan Chase, Bank of America and Wells Fargo have added to oil-and-gas loss reserves, according to executives, and Citi and JPMorgan say they have reduced their overall energy exposure as well. Moves like that are prompting some U.S. drillers to seek costlier capital through the public markets as a way to stave off a potential cash crunch.

Energy XXI, an oil and natural-gas driller that focuses on the Gulf Coast and Gulf of Mexico, raised $1.45 billion in an early March debt offering based on concerns that their bank credit facility—a $1.5 billion revolver led by RBS and Wells Fargo—would be pared.

"We had to know it was coming down, we just didn't know how much," said Greg Smith, the company's head of investor relations, in a telephone interview with CNBC. Raising the public financing, he added, "was about being proactive on our end, because we don't want to face liquidity issues." (An RBS spokesman declined to comment, and Wells, which is now the sole lead lender in Energy XXI's new, $500 million credit facility, didn't respond to specific questions about the company.)

The dilemma Smith and his colleagues faced was part of a broader conversation going on between a multitude of bank lenders and energy companies. Known in financial circles as the "credit redetermination period," the months of April and September each year are when banks typically hold their semiannual reviews of the value of the so-called borrowing base, or the assets that drillers and related companies use as collateral for loans.