Last week Texas comptroller Glenn Hegar announced that Texas has added the multinational bank HSBC Holdings to its investing blacklist.
While these “sanctions” have nothing to do with war or other geopolitical motives, they do have to do with energy. Texas recently passed a law that requires pensions to divest from companies that are considered to be “boycotting” fossil fuels – a list that now includes HSBC.
Matt Smith, lead oil analyst for the Americas at Kpler, explained what it means for energy projects in Texas, and how the current banking uncertainty is affecting oil prices. Listen to the story above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: HSBC is now on Texas’s investment blacklist, along with several other big names in the finance industry like BlackRock and UBS. What’s behind these bans?
Matt Smith: Well, sure. I guess, first of all, it’s worth defining what a comptroller is, because to be honest, I didn’t know before this news came out. So essentially, a comptroller is someone who oversees the accounting and finance departments. And essentially, Glenn Hegar is the comptroller of Texas. And so, as you mentioned there, he announced sanctions on HSBC last week, which essentially means that Texas government entities have to sell, redeem or divest from any investments held with HSBC. The reason for this is because the comptroller said that HSBC is pushing a social agenda and prioritizing political goals over economic goals for clients. The reason HSBC was added to the sanctions list was because they announced last December that they won’t provide new finance or new advisory services for projects pertaining to new oil and gas fields, or whose primary use is in conjunction with those. So it’s really attacking these banks that won’t fund essentially the fossil fuel industry. And as you mentioned, HSBC isn’t the first bank to be hit with Texas sanctions. You’ve already got UBS, BNP Paribas and BlackRock on that list as well.
So Texas – as an oil and gas producing state – just takes offense, it sounds like, to any slight against more oil and gas.
So what does it mean in practical terms for Texas and for the companies that it blacklists?
Well, it doesn’t necessarily mean that there’s an issue for these companies. It just is a reflection that, as you said, Texas is taking umbrage essentially in terms of these companies not being willing to invest in the fossil fuel industry. All this wraps itself up, though, in kind of broader concerns hitting banks right now and how they could have a negative effect on US oil production.
So, for example, even prior to the recent banking turmoil, rising interest rates have been making it harder for oil and gas companies to borrow money. In fact, lending was already slowing for oil and gas companies prior to this recent banking turmoil because of rising interest rates. The thing is, a lot of these independent oil producers get their financing through smaller regional banks. So as confidence has been lost in some of these regional banks, they’re having to essentially tighten their belts, which may well be reflected in reducing credit facilities for oil and gas companies. And so, lower credit availability for these oil and gas companies, sort of joining the dots, means that they’ll probably have lower production activity. So it may hit that.
Just one thing though, the one saving grace that we might have here for the oil producers is that, because they’ve been so focused on improving their balance sheets and reducing their debt and boosting their cash flow over recent years, rather than pumping money into drilling activity, it means a lot of these companies are now in much better shape financially. So they have the ability to withstand these tightening conditions.
We talked about some of the issues hitting the oil and gas producers, but it does seem like oil prices have taken a real beating more than equities. Is the sell-off justified, in your opinion?
Not wholly. Partially it is, yeah. So the drop in oil prices has definitely been the result of the contagion that we’ve seen in broader markets here rather than oil-specific fundamentals really deteriorating. So prices have been justified in dropping from above $100 a barrel last year down to $80. But it’s much harder to make a case for the drop on WTI, that US benchmark, into the 60s here. So we should see a bit of a rebound. But the challenge is that when when there’s any kind of like external crises like we’ve seen in the last few weeks here, all these asset classes tend to correlate and commodities tend to lead the way – so either higher or lower – and in these cases, in this crisis, it’s lower because of recessionary concerns and the impact that will have ultimately on oil demand and gasoline demand.
But also, this latest problem has been exacerbated as well by a huge amount of speculative bets placed on high prices. So with China coming back, you know, exiting from the pandemic and lockdowns and with so much concern about Russia and supplies coming off the market, everyone was betting on higher prices. But as oil prices have dropped, they’ve essentially had to close those positions, which has essentially caused a cascading effect lower. And so that’s why we’re here in the 60s. But we should be rebounding going forward here.