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For regionals, cautious optimism on energy credits heading into earnings

Oil prices that have recovered and stabilized give analysts who cover regional banks in energy-heavy states reason for confidence as first-quarter earnings season approaches.

"It's still an issue, but certainly it is not the very big issue that it was a year ago at this time," John Rodis, a FIG Partners analyst who covers several banks with energy exposure, said in an interview.

Though there has been some pricing volatility this year, benchmark crude oil prices have recently hovered in the $50s, far better than lows in the $20s reached early last year, on a per-barrel basis. Analysts anticipate stability heading into the summer months, when American drivers often ramp up demand for gasoline that is refined from oil. Strong demand would support higher prices.

Price stability would buttress oil exploration and production companies, providing motivation to build up activity that could result in higher revenue and therefore declining odds of new credit problems.

"I think if we can keep oil prices where they're at … it should stabilize a lot of things," David Zalman, chairman and CEO of Houston-based Prosperity Bancshares Inc., said at a conference in March, when oil prices also hung in the $50s.

In addition to domestic demand, Zalman also cited commentary this year from officials at the Organization of the Petroleum Exporting Countries that suggest they intend to manage inventories to ensure global price stability. OPEC is a coalition of major oil producing countries, many of them in the energy-rich Middle East, and it heavily influences policies and prices.

"I think they're in agreement, they want to keep the prices a little bit higher too," Zalman said. "So, for the near term, I think that we're going to see oil probably where it is or maybe even a little bit better, in the $60s probably."

But bankers and analysts say that some credit troubles tied to the oil-price slump that deepened last year could continue to work through lenders' portfolios in the form of charge-offs or loan restructurings, leaving management teams to carefully supervise their energy books and analysts to closely monitor them for any surprises.

"There still are [energy] companies that are struggling, and so I think 2017 is a year when we do see some additional expected loan losses come through," Jefferson Harralson, an analyst at Keefe Bruyette & Woods Inc. who covers Texas banks, said in an interview.

The expected hiccups noted, barring another price slump, many analysts and bankers expect that overall energy lending conditions will improve as the year wears on and that charge-offs will prove manageable.

For example, Pete Guilfoile, chief credit officer at Comerica Inc., said recently that the Dallas-based bank still has exploration and production borrowers that are working through reorganization processes. However, "We expect that the vast majority of those [are] not going to take charge-offs, or charge-offs will be relatively modest, but we're watching those carefully," he said at a March conference.

And, assuming the spring redetermination process — when banks reassess energy borrowers — culminates positively as anticipated, "I think we're expecting to see a fair number of upgrades in our energy portfolio by the end of the second quarter and then continuing on into the third quarter."

Rodis of FIG Partners said he tracks more than 20 banks active in energy lending — a majority of them in Texas and Oklahoma — and their exposure to oil and gas typically hovers between 3% and 5% of total loans, while the average reserve against potential losses on such loans is roughly 5%. That, he said, indicates these companies are sufficiently guarded against problems in energy. Many of them could draw down such reserves this year, boosting earnings, again so long as oil prices remain stable or climb higher.

"Given the problems that we saw, it makes sense to continue to track" energy books, Rodis said. "But I'm not overly concerned."