Hidden Exposure To Oil Could Crash Barclays plc, HSBC Holdings plc And Centrica PLC

When investors think of playing the oil price, they naturally start with oil stocks. But plenty of other sectors are exposed to the fortunes of the black stuff.

Oil banks

Any industry that consumes oil, such as airlines and chemicals firms, gives you plenty of exposure to price swings, which affect their cost base. Food and general retailers are also affected, as cheap oil puts money into their customers’ pockets, higher pump prices drain it away.

Russ Mould, investment director at AJ Bell has noted that the big banks are also exposed and could suffer in the event of fresh oil price weakness. This is troubling, given that they are already this year’s worst-performing UK sector.

Crude talk

Crude is rising for now, with Brent hovering around $44 a barrel. As US production takes a hit, it may rise higher still. Following last week’s failed talks in Doha, the opposite could happen. Saudi Arabia has since threatened to hike output by as much as 2m barrels a day to over 12m to overtake Russia as the world’s top producer. Russia said it could reply in kind. Venezuela has warned of another oil price crash. Anything could happen from here.

Fresh declines in crude will stoke renewed fears of loan defaults by some oil producers and Mould says this should prompt investors to take a closer look at the banks’ energy loan books, notably HSBC Holdings (LSE: HSBA) and Barclays (LSE: BARC).

Billion dollar questions

HSBC revealed $600m in impairment charges against its energy loan book in its 2015 results, including a hefty $400m in the fourth quarter alone. That’s out of a total loan provision of $3.7bn, or $1.6bn in Q4. The bank has $29bn in drawn loans from energy firms, 2% of the group total, of which 2% were already impaired.

Barclays has disclosed oil and gas loan exposure of £18.2bn, equivalent to 5% of group risk-weighted assets. It also posted £106m of impairments in 2015, out of a group total of £2.1bn. It warned an average oil price of $30 a barrel would lead to additional loan provisions of £250m while $25 would require an estimated £450m in extra loan loss provisions.

Lloyds Banking Group and Royal Bank of Scotland didn’t feel it necessary to make specific disclosures on their oil exposure in their full-year statements or presentations, which Mould suggested may be a good sign. 

Energy hit

British Gas owner Centrica (LSE: CNA) also has hidden vulnerability to oil and gas. Centrica has admitted that it will never be a global player in oil and gas exploration and production, but it has plenty of exposure through its energy supply and services businesses. Cheap energy has hurt investors, forcing it to pare back its dividend, capital expenditure and spending to remain “robust”.

Barclays, HSBC Holdings and Centrica are down 30%, 23% and 33% respectively over the last two years. Their hidden exposure to oil and gas prices has wreaked some of the damage and further falls could inflict yet more pain. On the other hand, if oil continues to climb it could trigger a much-needed relief rally.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays, Centrica, and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.