The Other Side of the Oil Trade
Today most people are focused on the oil crash, but there are other moving parts they should pay attention to…
To start, many smaller exploration and production companies are surviving on thin air and a bunch of loans. With oil prices so low, most of these companies can’t meet their debt service, and that means problems for more than just the companies with the loans.
The banks that made those loans could be in trouble as well!
Unfortunately, banks love bad investments.
Just look back to the mortgage crisis of 2008 or the savings and loan crisis in the late ‘80s. If you think bankers are smart, you need to change your thinking.
Their greed trumps any common sense.
So you have oil prices falling for a decade now.
And what do bankers do?
They invest in shale companies as far as the eye can see. Meanwhile, two major oil producers, Iran and Venezuela, are about to collapse and add even more pressure to prices. Then add our two “friends,” Russia and Saudi Arabia, which control a big chunk of the world’s daily production, and you have disaster written all over the place!
With friends like these, who needs enemies?
Of course, oil will find its bottom, and that’s why we are only now beginning to dip our toes in the sector.
As I mentioned earlier, banks did not just “dip their toes” in the sector, and that’s why many are at risk of getting their earnings and book values hammered.
The health of banks is measured by tangible common equity (TCE). TCE measures what a bank is worth after all its obligations. The higher that number is, the better.
However, loans are measured against TCE, so the higher that number as a percentage, the worse the situation.
For example, a bank that is leveraged to 100% of TCE is worse than one at 10% of TCE. As you will see in the chart below, there are a lot of banks you should avoid, short or make sure are not in your portfolio.
Here’s KBW’s (an investment bank) list of U.S. banks whose loan exposures to the energy industry are highest relative to TCE as of December 31, 2019.
- BOK Financial Corp. – 108%
- Bank7 – 104%
- Cadence Bancorp. – 76%
- CrossFirst Bankshares – 69%
- Cullen/Frost Bankers – 53%
- Independent Bank Group – 45%
- First Horizon National Corp. – 39%
- Hancock Whitney – 38%
- Associated Banc-Corp. – 35%
- CBTX – 33%
- Comerica – 32%
- Allegiance Bancshares – 31%
- East West Bancorp. – 29%
- Prosperity Bancshares – 26%
- BancFirst Corp. – 25%
- Zions Bancorp. – 25%
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About Karim Rahemtulla
With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.