BARC Barclays Plc

By Rachel Louise Ensign 

When oil fell below $30 a barrel earlier this year, banks turned away from lending to energy companies. The price of crude has bounced back nearly 80% from its February low, but banks are still wary.

Big banks cut loans to the energy sector by about 3% in the second quarter over all and some individual lenders pulled back much more, according to an analysis of July and August securities filings by Barclays analysts.

Oil's continued volatility isn't helping. Oil prices rose by around 26% in the second quarter, only to fall nearly 14% in July. This month, prices have so far bounced back by more than 12%. Moreover, there is increased regulatory scrutiny of energy-sector lending and exposures at banks.

Houston-based Green Bancorp, with about $4 billion of assets, is among those that has pulled back. Chief Executive Geoff Greenwade said this month that energy lending is "7% of our loan portfolio," but that, "It takes about 80% of our time." The bank earlier this year decided it didn't want this headache and said it would divest its current energy portfolio and halt future lending.

Despite oil prices being on firmer ground of late, energy loans remain the most troubled part of banks' portfolios. And lenders have socked away billions to cover potential losses.

At large U.S. banks including J.P. Morgan Chase & Co., Wells Fargo & Co. and Bank of America Corp., a median 42% of energy loans were considered criticized in the second quarter, Barclays said. This means they are at higher risk of default. While few energy loans are actually going bad -- a median 1.5% were charged off in the second quarter -- large banks have collectively set aside $6.4 billion in reserves for energy loan losses.

Lenders are getting rid of energy borrowers in a variety of ways. Some are cutting the amount of credit they are willing to extend. Others, like CIT Group Inc. and Green Bancorp, are also selling some loans off entirely.

Banks with particularly big declines in energy loans included U.S. Bancorp and Comerica Inc.; each trimmed energy exposure by around 11% in the second quarter.

Murphy Oil Corp. is one example of how this has been playing out. When the company in August renewed its $2 billion credit line, eight of the 18 banks who took part in the current revolver -- including U.S. Bank and Comerica -- didn't sign on for a new loan that extends through 2019, according to recent securities filings.

In the end, the Arkansas exploration-and-production company got $1.2 billion under the new line of credit, while the other banks remained lenders under the older loan that expires next June. The banks that continued lending to the company -- including J.P. Morgan, Bank of America and Wells Fargo -- lent Murphy less than they had under the previous credit agreement.

A Murphy spokeswoman declined to comment on whether the company would have taken out a larger revolver if those lenders had signed on.

Bankers and their advisers say a tougher regulatory stance is playing a role: The Office of the Comptroller of the Currency in March published an updated manual for energy lending. While the OCC said in a statement that the "handbook imposes no new restrictions on oil an gas lending," banks say this has effectively established stricter guidelines for such loans.

Banks have said the new manual has led them to classify more exploration-and-production borrowers as higher risk, or criticized. Using one key measure in the handbook, 91% of a sample of independent exploration and production companies would merit a criticized rating in 2016, according to an analysis of such companies' financials by law-firm Haynes and Boone LLP.

Over all, large banks cut loans to exploration and production companies about 8% in the second quarter, Barclays said.

Not all firms are retreating. Some banks are boosting energy lending as others hang back. J.P. Morgan Chase & Co, for instance, increased energy loans by 3% in the second quarter. The bank's trading desk has also bought some revolver debt of distressed energy borrowers from smaller banks for between 85 and 90 cents on the dollar since the second quarter, a person familiar with the matter said.

Emily Glazer contributed to this article.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

(END) Dow Jones Newswires

August 25, 2016 14:35 ET (18:35 GMT)

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