Oil and gas companies asked, then received changes to Fed coronavirus stimulus program

Help with refinancing debt could help shale companies in PA

• Reid Frazier
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  Reid R. Frazier is an energy reporter for The Allegheny Front, a Pittsburgh-based public media outlet covering the environment in Pennsylvania. His work has aired on NPR and Marketplace.

Oil and gas companies in Pennsylvania could benefit from a change to a Federal Reserve stimulus program aimed at helping businesses during the coronavirus pandemic.

Critics have attacked the changes, calling them a “stealth bailout” for heavily indebted oil and gas companies.  

The changes were made in late April to the Fed’s Main Street Lending program, part of the $2 trillion coronavirus relief bill passed by Congress in March. The $600 billion loan program is intended to help small- and medium-sized businesses that were in good financial shape before the pandemic struck. 

When the Fed rolled out the program, it prohibited companies from using the loans to pay off debts. 

Oil and gas companies and their advocates asked the central bank to loosen up those guidelines. One of their biggest asks: They wanted to be allowed to use the loans to pay off other debts, too. 

The Fed’s final guidelines gave those companies their wish — companies could use the loans to pay off some types of debt. And the maximum loan size increased from $150 million to $200 million. 

Oil-state Sens. Ted Cruz of Texas and Kevin Cramer of North Dakota praised the changes.

 “It’s another arrow in the quiver” to help the oil industry in his state, Cramer said in a video statement. 

Environmentalists questioned whether the government should be throwing a lifeline to the fossil fuel industry — one of the country’s biggest sources of greenhouse gases. Emissions must be cut dramatically, scientists say, if the world is to avoid the worst effects of climate change.

Others saw the Federal Reserve — an independent institution that is supposed to stay outside politics — giving preferential treatment to a powerful industry with substantial ties to the Trump administration. 

“This is an oil bailout for a specific set of companies,” said Graham Steele, the director of the Corporations and Society Initiative at Stanford Graduate School of Business.

Steele, a former aide to Democratic Senator Sherrod Brown of Ohio, said the program is risky because climate change risks making these companies’ assets — oil and gas reserves — “stranded assets” in the future, if governments tax carbon to avert runaway climate change. 

He said the loans are also risky because many of the companies were doing poorly before the pandemic.  

“(The Fed) had structured the program in a way so as not to lose taxpayers’ money. And now members of Congress and industry have lobbied them. And under that pressure, they have buckled. They have changed the program to help out a specific industry,” Steele said.

The Federal Reserve says changes to the program weren’t made with the oil industry in mind, and that other industries could benefit. Business groups like the U.S. Chamber of Commerce also lobbied for the changes. 

But observers see the Fed’s revisions to its lending guidelines as a clear win for oil and gas companies. 

David Livingston with Eurasia group, a risk management firm, said the changes are especially good for oil and gas companies because of the high amount of debt some have accumulated.

He said they’ve had to borrow because revenues from oil and gas alone have not been enough for them to cover their costs. 

“They were sort of running on a treadmill and the entire shale enterprise was increasing its production month over month, year over year over year, in large part, thanks to the continued provision of relatively low cost capital,” Livingston said.

The idea behind the strategy was that prices for oil and gas would eventually rise and they’d be able to pay off their debts. But the opposite has happened, at least for oil. It plummeted into the negative range in April, though prices are recovering. 

The loans could also help natural gas companies that operate in Pennsylvania. 

A group of GOP senators from Pennsylvania and other Appalachian states wrote in favor of the changes in April. 

“Many producers will have debts come due before this health crisis is expected to subside,” the letter stated. “These companies would have been able to pay their debt obligations out of normal cash flows if not for the virus.” 

Jeffrey Ventura, CEO of gas driller Range Resources, also lobbied the Fed to loosen its guidelines. A company spokesman did not respond to requests for comment. 

The CEO of the Independent Petroleum Assocation of America wrote Fed Chair Jerome Powell in April that loosening the loan guidelines would “limit the number of defaults” in the industry.

“Oil and natural gas producers are not looking for a government handout; they are seeking a bridge to help survive this economic disruption,” the letter stated. 

It’s unclear which companies would take advantage of the program. Spokesmen for CNX Resources and Cabot, two of Pennsylvania’s leading drillers, both said their companies would not apply for the loans. EQT and Range Resources did not respond to requests for comment. 

The crash in oil prices may have actually helped some of these companies by inflating the price of natural gas.

Since oil wells also produce natural gas, when oil production slows, less natural gas comes onto the market, and the price for natural gas goes up. Gas futures for January 2021 are trading above $3 per million British Thermal Units, well above the current $1.84 price.  

Still, some of these companies are holding debts they accumulated from leasing millions of acres of land during the fracking boom that began around 2008.

“For years, shale was all about grabbing land,” said Bill Holland, who covers the natural gas industry for S&P Global Market Intelligence. “So these companies spent big to lease big, big tracts of land in western Pennsylvania, West Virginia, Ohio, in the Utica and Marcellus shales — the land grab. And that debt is still on their books.”

One company that could benefit from the Fed’s new loan program is Chesapeake Energy, which has a big debt payment coming due this year. The company did not respond to a request for comment.  

But Holland said it’s unclear whether Chesapeake could qualify for the loan. News outlets are reporting the company, saddled with over $9 billion in debt, is getting ready to file for bankruptcy.

CORRECTION: A previous version of this story misstated the name of Bill Holland’s publication. 

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