UBS Investment Bank holds a large portfolio of loans to companies involved in extracting natural gas using the combination of horizontal drilling and hydraulic fracturing. Because of the healthy fees associated with generating those loans initially, UBS, along with several other large investment banks, supported drilling programs for production that was not justified by the existing demand for natural gas.
The inevitable happened; more gas was produced than customers needed or wanted. That led to a glut and rapid price declines. Many of the entities that borrowed money from UBS are now in danger of default because their revenue is insufficient to pay the carrying costs of the loans for much longer. Recent sales from the loan portfolio have closed at 65 cents or less on the dollar.
UBS appears to be addressing this business challenge by issuing analyst reports to investors encouraging the closure of several merchant nuclear power plants. Their permanent removal from the market will soak up the natural gas glut, push prices up, and restore the value of the loan portfolio.
Good for UBS and the underwater borrowers, bad for environment, bad for consumers.
Above synopsis Added Oct 1, 2015
A friend sent me a link to a Boston Globe article titled Tough times, no easy answers for Pilgrim Nuclear Power Plant.
It includes a smoking gun.
A report by UBS AG this week estimated that Pilgrim is slated to lose $25 million this year and about $60 million during the next four years.
“The magnitude of the losses is unpalatable,” said Julien Dumoulin-Smith, one of the authors of the investment bank’s report, which noted that Entergy’s stock has fallen 30 percent this year and advised investors to sell. “Wall Street is demanding better.”
Entergy officials acknowledge the problems facing Pilgrim and expect to make a decision about its future in coming months. The plant was refueled last spring, had its license renewed three years ago, and can continue operating until 2032, as long as regulators deem it safe.
The authors of the UBS report, “The Nuke Retirements are Coming,” offered what they called a “sobering view” of the future of nuclear power. They suggested that retiring plants may be the best way Entergy can offset the “twin headwinds” of cheaper natural gas and increasing amounts of renewable energy.
My skeptical mind immediately wondered, did UBS make any loans to companies involved in hydraulic fracturing. A few days ago, I read a couple of articles indicating that those loans are at risk of default due to continuing losses by extractors in a low natural gas price environment.
A quick search led me to a March 18, 2015 Wall St. Journal article — among many other sources – with a title that almost says it all. Banks Struggle to Unload Oil Loans Citigroup, Goldman, UBS and others face losses as investors balk at riskiness of energy sector. If you search on that title, you should be able to get access to the entire article, even without a WSJ subscription.
Here are some key phrases confirming my smoking gun suspicion that UBS analysts have most likely been encouraged to do what they can to convince investors to pressure companies that own nuclear plants to shut them down instead of selling them off to buyers that might be able to make them profitable again.
Investment banks helped fuel the oil-and-gas exploration boom of the past decade by making loans valued at about $1 trillion to companies in the energy industry, most of which they sold to investors.
The banks held off for several months, hoping that oil prices would rebound. Instead, Nymex crude prices hit a fresh low this week. A spokesman for C&J declined to comment.
The loans that haven’t been sold could yet recover value if the market turns around.
Houston-based Express Energy Services borrowed $220 million in October from a group of banks led by UBS and Goldman Sachs to pay for a so-called leveraged buyout by Apollo Global Management LLC.
The banks tried selling the loan several times before unloading it this week at a price below 65 cents on the dollar, taking a roughly $66 million loss, said a person familiar with the matter.
There is almost no doubt that closing 5 large nuclear power plants would help natural gas and oil prices recover and reduce the losses that Wall Street banks face on the loans that they ill-advisedly made to companies drilling for natural gas even when the market was adequately supplied.
Price wars, like any other war, can be very painful for all participants.