Two of Canada’s largest investment banks say they don’t expect to meaningfully cut credit to the energy sector despite the widening gap between Canadian and U.S. benchmark oil.
The comments from BMO Nesbitt Burns Inc. and CIBC World Markets Inc. come as Canadian banks are undertaking their fall borrowing base redeterminations – a biannual process that occurs in fall and spring where banks review their loans to the energy sector.
Banks often use an energy company’s reserves as collateral for lending. Low oil prices reduce the value of those reserves, which can mean credit reductions for producers.
Recently, oil sands producers in Western Canada have been forced to accept steep discounts for their crude as the lack of pipeline capacity and maintenance shutdowns at U.S. refineries have led to surpluses in Alberta.
But Shane Fildes, the head of BMO’s energy group, says he doesn’t expect to see dramatic reductions in credit stemming from the fall loan reviews.
That’s because the differential is expected to start narrowing again, and the bank uses future price projections – rather than the current spot price – in its credit calculations.
“That sort of tension that’s going on, we think that’s going to get resolved,” Mr. Fildes said in an interview in Calgary, adding that there is a strong economic incentive to deal with the pipeline issues.
“The refinery maintenance stuff is obviously temporary. The Enbridge Line 3 situation is looking good."
CIBC also said it doesn’t anticipate any material change in its support for Canada’s energy sector as a result of the review.
“We are working closely with our clients to face the unique challenges and opportunities in Canadian energy,” a CIBC spokesperson said in an e-mail.
Raymond James analyst Jeremy McCrea said he doesn’t expect that banks will outright cut credit, particularly given that the differential is expected to improve by next April.
“You have a long history with the banks here in Canada supporting the [exploration and production] sector, and I think a lot of them don’t want to ruin relationships over these near-term blips in differentials,” Mr. McCrea said.
“This is not the first time that we’ve seen these blips in differentials, and ultimately we find ways to resolve that."
But, he added, some banks may be encouraging their energy clients to reduce their capital spending plans for 2019 until economic conditions stabilize. That’s likely caused some producers to delay announcing their 2019 budgets, Mr. McCrea said.
“I think the banks are telling them to cut their CapEx budgets here. And the companies are saying ‘Well we don’t want to come out with this kind of a low CapEx budget.’ So that’s why they’re deferring it,” Mr. McCrea said.