Wells Fargo energy investment unit sought risky deals, faces losses
By Dan Freed
NEW YORK (Reuters) - When Cubic Energy Inc's bankruptcy plan took effect on March 1, shareholders of the Dallas-based oil and gas company were wiped out. Among the losers was Wells Fargo & Co.
The bank had a nearly 10 percent stake in Cubic Energy at the end of 2015 - worth more than $25 million at the company's peak - through a private equity-style unit called Wells Fargo Energy Capital.
The No. 3 U.S. bank by assets, like its rivals, has billions of dollars' worth of exposure to the struggling energy industry through regular loans that are souring. But the case of Cubic Energy shows that Wells Fargo went further into risky areas than other banks, and may now face a reckoning.
The whole sector has been devastated by a 60 percent plunge in oil prices from highs of over $100 a barrel in 2014. The price drop has squeezed energy firms, especially smaller ones, and made it harder for them to pay back loans.
Some of Wells Fargo's most volatile exposure sits within Wells Fargo Energy Capital, a unit that sought fat returns through equity investments and high-risk loans to small companies like Cubic Energy, assuming the energy boom would last.
On top of the equity investment, Cubic owed Wells Fargo nearly $30 million in debt as of Nov. 30, according to its reorganization plan. The bank received land and other assets in Louisiana as part of the reorganization.
What those Louisiana assets are worth today is anyone's guess, said Jon Ross, who was Cubic's vice president of operations until it collapsed.
"Valuations now are so crazy in the oil and gas industry," he said. "What is really worth anything at $40 oil and $2 natural gas? So it's hard for me to say right now - and I'm being honest - how you value anything." Continued...