How Wall Street Drove the Oil & Gas Drilling Boom That’s Turning into a Disaster
by Wolf Richter
WolfStreet.com
January 13, 2015
Wall Street spent years hyping, propagating, and funding the oil and gas drilling boom in the US. It handled the bonds and loans issued by often junk-rated companies. It instigated the waves of mergers & acquisitions, profiting every step along the way – advisory fees, bridge loans, syndication of loans, underwriting of bonds, etc. At the very tippy-top of the market, it pushed in the opposite direction and instigated spinoffs, creating independent publicly-traded companies that didn’t have a chance and cost unsuspecting investors in their shares and junk bonds a barrel of money. It orchestrated a series of similarly misbegotten energy IPOs.
Wall Street made money off the entire spectrum of companies associated directly or indirectly with oil and gas. It was one heck of a party.
The money had to keep flowing. Fracking is a capital intensive treadmill for companies that spend a lot more on drilling and completing wells than they get in cash from their production. Barclays estimated that larger drillers outspent their cash flows by 112% and smaller to midsize companies by a breathtaking 157%. The hole had to be filled with new money, or else the music would stop.
Wall Street hyped these junk bonds, leveraged loans, or new shares and pushed them into the hands of investors that had been bamboozled by the Fed into thinking that it had removed all risks from the equation. Investors closed their eyes and bought these nearly risk-free securities that are now decomposing before their very eyes.
But it didn’t matter to Wall Street because investment banking revenues were soaring, and because private equity firms where attracting a tsunami of money for their energy funds, and they all extracted their fees, and everyone got big bonuses, and to heck with the rest.
The money came from all directions, from TBTF banks, from local and regional banks, from PE firms, overseas investors, pension funds, hedge funds, mutual funds, and individual investors.
But here are the top 10 banks, according to DealBook, that in 2014 extracted the most investment-banking revenues from the oil and gas sector, or rather from its investors. Bailed-out and still troubled Citi was the king of the hill, obtaining $492 million in IB revenues from the oil and gas sector, representing 11.8% of its total IB revenues. Together, the ten skimmed off $3.52 billion last year.
The Rest…HERE
