with Paulina Firozi
Prodded by oil-state lawmakers and lobbyists, the Federal Reserve will let bigger businesses take out emergency loans meant for small and medium-size companies and will allow them to use the cash to pay down old debt.
Taken together, the changes announced Thursday appear to be a victory for the U.S. oil and gas sector, which has been hit hard by the coronavirus pandemic and which lobbied for better lending terms from the Fed.
With demand for oil dropping dramatically amid stay-at-home orders to stop the spread of the virus, the price per barrel has been sliced in half since the start of March.
Now many American petroleum companies, heavily indebted after years of expanding production, find themselves on the verge of filing for bankruptcy if oil keeps trading under $30 per barrel.
But the changes are now fueling concerns the Fed will bail out a polluting industry over other parts of the economy.
"The major changes announced today mirror the top requests of the oil and gas industry," tweeted Bharat Ramamurti, a member of the Congressional Oversight Commission tasked with overseeing distribution of the stimulus funds. “That raises questions about how the changes promote the broader public interest.”
The Fed's announcement could be a boost to the oil sector until the price per barrel rebounds.
The central bank said Thursday businesses with up to either 15,000 employees or $5 billion in annual revenue can apply for loans from its Main Street lending program.
The new threshold is much higher than the Fed's initially proposed caps of 10,000 employees and $2.5 billion in revenue, allowing some mid-tier petroleum producers, such as Houston-based Occidental Petroleum, to qualify.
The Fed will also give companies with higher debt-to-earnings ratios access to more loan options.
That change could benefit leveraged companies once at the forefront of the fracking boom, including Apache Corp. in Houston and Chesapeake Energy in Oklahoma City, according to Andrew Park, an analyst at Americans for Financial Reform, which advocates for banking reform. According to Reuters, Chesapeake is already preparing to file for bankruptcy.
Sen. Kevin Cramer (R-N.D.) suggested the changes may help oil operators in his state, too. “It is another arrow in the quiver, encompassing a larger pool of borrowers, such as North Dakota’s oil and gas industry,” he said of the expanded Fed program.
And in a move called for by Sen. Ted Cruz (R-Tex.), companies will also be allowed to use the Fed-backed loans to make interest payments on existing loans or, in the case of certain “priority” loans, refinance their debt. That latter lending option comes with a catch: Any bank offering a priority loan needs to retain 15 percent of it, raising the bar for which companies get them.
The Fed had initially said it would not allow companies taking out money to use it to pay down existing debt on their books. In a letter last week to Fed Chair Jerome H. Powell, Cruz said that would prevent distressed oil and gas companies from getting “the short-term liquidity they need to avoid bankruptcy.”
The Independent Petroleum Association of America, which represents small and midsize oil companies, had lobbied for permission to use Fed-backed loans to pay down debt and expressed cautious optimism after the Fed's announcement Thursday.
“The Federal Reserve’s announcement today sends a clear signal to IPAA members that the Administration is willing to address some of our recommendations,” IPAA spokeswoman Jennifer Pett wrote by email.
She added her organization is “still digging through the directive and asking our members to evaluate its impact.”
Environmentalists and Democrats in Congress were dismayed at the Fed's decision.
Polluting companies, they say, do not deserve a taxpayer-funded bailout, especially after stacking their balance sheets with debt to expand drilling during the shale revolution.
“By hook or by crook, Big Oil is going to try to get a bailout while small businesses shutter,” said Sen. Edward J. Markey (D-Mass.). “It is deplorable to spend good money after bad and waste taxpayer dollars on an industry that has been struggling for years due to bad business decisions.”
Graham Steele, director of the Corporations and Society Initiative at Stanford Graduate School of Business, said the Fed's initial restriction against paying off old debt was ultimately meant to protect taxpayers' investment in firms that took Fed-backed loans.
“But now they are rolling them back under lobbying pressure,” he said.
Ramamurti also worried about the lack of “any meaningful requirement” for companies lent money to keep employees on the payroll.
The Fed and the Treasury should be transparent about why they made these changes today -- and rejected others that were focused on trying to keep workers employed or get them back on payroll. END— Bharat Ramamurti (@BharatRamamurti) April 30, 2020
In its announcement Thursday, the Fed suggested it was not making the moves to benefit any single industry. The bank said it received more than “2,200 letters from individuals, businesses, and nonprofits,” and that in response it “decided to expand the loan options available to businesses.”
The central bank added that it will announce a start date for the Main Street lending program “soon.”
More on oil markets
The historic drop in demand means small oil companies are turning off their wells.
It’s also happening faster than expected, the Wall Street Journal reports. Some small, privately held oil drillers that make up a quarter of U.S. production are shuttering wells following the record oil price collapse last week, a move that could reverse if demand picks back up.
“Several small producers said they don’t plan on bringing wells back online until regional prices climb above $20 or $30 a barrel and stay there for a while,” per the report. “…The motivation behind shutting in the wells is simple: Better to keep oil in the ground than lose money selling it at current prices. The bet is that prices will recover enough to cover restart costs and boost sales within a few months.”
Shell chief says the oil business will have to “reestablish” its strategy going forward.
Ben van Beurden, chief executive of Royal Dutch Shell, expects the oil business will be permanently changed in part because of customer behavior.
"It is, of course, a difficult day"— Bloomberg (@business) April 30, 2020
Shell CEO Ben van Beurden says the energy giant has reached an "inevitable moment," as it cuts its dividend for first time since World War Two https://t.co/6gvYxo9aXj pic.twitter.com/NGYWhze7vy
“There will be changes, and therefore we have to be ready for that,” he said in an interview with Bloomberg Television. “That means that we probably have to reestablish what is going to be our strategy.” He added lifestyles could be “altered for some time to come, whether that is because of the economic bandwidth that people will have or businesses will have, or whether it is because of attitudes.”
Keeping California's beaches closed remain a point of contention.
Gov. Gavin Newsom (D) ordered the temporary closure of all state and local beaches in Orange County after residents flocked to the sites over the weekend, flouting orders to stay at home.
“The action marks Newsom’s most symbolic response to the pandemic so far as tensions rise over when and how to reopen the state and allow Californians to return to their normal, everyday lives,” the Los Angeles Times reports. “After photos of crowded Orange County beaches went viral last weekend, Newsom chastised beachgoers who ignored the state’s restrictions, saying they could prolong the spread of the coronavirus in California and put the health and safety of others at risk.”
Los Angeles and other counties have already ordered beaches closed.
Global warming watch
Satellite shows where ice is melting the fastest in Antarctica.
A paper published in the journal Science details where ice is accumulating as well as where it is disappearing. That information is critical to understanding the southern continent's various impacts on sea-level rise.
The new data could help scientists understand the “largest driver of ice loss in Antarctica, the thinning of floating ice shelves that allows more ice to flow from the interior to the ocean, and how that will contribute to rising sea levels,” the New York Times reports. “Researchers have known for a long time that, while the continent is losing mass overall as the climate changes, the change is uneven. It is gaining more ice in some areas, like parts of East Antarctica, and losing it quickly in others, in West Antarctica and the Antarctic Peninsula.”
In other news
Some California wildfire victims say the PG&E settlement is flawed.
A group of fire victims and lawyers say they will see a lot less than the $13.5 billion that was determined in the settlement in December because half the settlement will be paid out in PG&E shares, the New York Times reports. The group is pushing for changes as a deadline approaches to vote on the agreement.
“Two-thirds of the votes cast by the roughly 70,000 victims, most of whom live in Northern California, by May 15 must be for the deal for it to be approved,” per the report. “If the victims don’t ratify the deal, PG&E might not be able to resolve its bankruptcy by June 30, a deadline state lawmakers set for the company to qualify for a $20 billion wildfire fund that will help pay for future wildfire claims against privately owned utilities.”
This cat has her own weather segment most nights.
“Betty the Weathercat” has boomed in popularity since she first showed up on a segment with weatherman Jeff Lyons on Channel 14 News in Evansville, Ind.