More energy firms to go bankrupt, while JP Morgan says banks will cut their credit lines

The continuing drop in oil prices has plunged the energy industry, including fuel and gas, into a crisis. Their failure to pay their loans on time, or at all, will force their financial institutions, such as banks, to take a harder line when it comes to credit. About 175 energy firms are forecasted to file for bankruptcy if things do not improve.

The BBC News cites a report made by the Deloitte Center for Energy Solutions, which says that approximately 175 oil companies run the risk of filing bankruptcy this year. This development will reduce their ability to repay their loans punctually; default is another risk that the banks, which have lent them money, also face.

Marianne Lake, the chief financial officer of JP Morgan Chase and Co., describes the grim scenario facing the companies and their financial backers: "Since year-end, expectations for oil prices have worsened and stresses have continued to permeate the value chain." Crude oil prices have hit a low of $31.87 a barrel on Tuesday, and projections estimate a continuing slide to $25 by middle of the year.

A related report by Reuters depicts the hard times that banks are experiencing. A temporary slide to $30 a barrel had already caused many firms to lay off personnel and offload assets. Cash-strapped as they are, these oil companies face another new and more difficult challenge: their banks may reduce their credit limit by 15-20%. Fortunately, there will be some flexibility on the adjustment of their credit limit, depending on their current financial health, says Doug Petno, head of JP Morgan's commercial bank, discloses.

Bloomberg adds that JP Morgan itself is preparing for a worst-case scenario. First, it will boost reserves by $1.5 billion this year to cover its risks, especially if the price of oil does drop to $30 a barrel. Second, it already has 150 oil companies on its list for a potential closure.

Tags

JP Morgan, banks, energy firms, oil slump, credit lines, bankruptcies

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