Banks have started to feel the effects of the turmoil in the energy sector. Oil Prices crashing to multi-year lows has made it difficult for a good number of energy companies to pay back their loans. Wells Fargo & Co (NYSE:WFC) is one of the banks feeling the effects of a plunge in oil prices, having invested heavily in some of the riskiest subsectors in the industry.
Just like other banks, the nation’s third-largest investment bank has billions of dollars invested in the energy sector. A point of concern for many investors is how exposed the nation’s third largest bank is. Goldman Sachs (NYSE:GS) in a research note has already pointed out that 80% of the bank’s investment in the sector is in two of the riskiest subsectors, being exploration and production.
In Cubic Energy Inc alone, Wells Fargo lost $25 million worth of investment on its 10% stake. On top of the equity investment, it is emerging that the energy company owed it $30 million in debt.
Wells Fargo could recoup some of the money having received some land and assets in Louisiana as part of the reorganization. However, that is entirely dependent on the valuations, given the turmoil in the sector.
Wells Fargo’s risky investments sit in its Energy Capital unit. The unit was specifically designed to pursue big returns through high-risk loans and equity investments like Cubic Energy. As of January 2014, it had a portfolio base of about $2.1 billion.
Even though the group is relatively small, it continues to evoke serious concerns on Wall Street. Given that the US energy sector faces an uncertain future, the unit could leave the bank vulnerable to more losses.
The bank has already set aside $1.2 billion to cover losses in the energy industry. Piper Jaffray analyst Kevin Barker believes the bank may have to set aside an extra $600 million given the turmoil in the sector that refuses to go away. Everything should become more clear as banks start to report their first quarter earnings this week.