SNL Energy: oil shock extends its reach to BDCS, Fintech

Consumer-facing financial technology companies may benefit from lower prices at the pump, while certain business development companies have come under pressure as the energy sector suffers.

Crude oil’s slump has had ramifications extending well beyond the price at the pump.

The domino effect looks likely to hit financial institutions in oil-heavy regions of the U.S. and the investment portfolios of a number of big insurers. An analysis conducted by SNL also found a number of U.S. financial technology and specialty finance companies moving either in trajectories similar to the one the commodity has taken since the summer of 2014 or in ones diametrically opposed to it.

StoneCastle Financial Corp., a closed-end investment company that focuses on passive investments in community banks, has moved virtually in line with falling oil prices. The company has exposure to a number of banks that benefited from the energy boom, and its stock has come under pressure since a capital raise in the fall of 2014. StoneCastle’s stock more or less traced along with the SNL U.S. Investment Companies Index for the first three quarters of 2014 but took a sharp drop about the same time that oil’s most significant decline began.

Some of the largest investments on StoneCastle’s balance sheet as of Sept. 30, 2014, were in community banks that serve regions that benefited from the domestic oil and gas boom. According to an N-Q filing, StoneCastle held $13.8 million of fixed-rate cumulative preferred stock in North Dakota-based BNCCORP Inc.; $7.6 million in preferred shares of Harrison, Ark.-based Community First Bancshares Inc.; and $3.8 million of preferred stock in Wichita, Kan.-based Fidelity Financial Corp. Harrison, Ark., sits not too far from the Fayetteville shale play, while southern Kansas has long been an area for oil and gas development. That development ramped up during the most recent boom period as energy companies sought to tap the Mississippian limestone.

Energy producers and power companies do not generally take out loans from community banks, so the impact of a prospective oil and gas bust would not come from that source. Small businesses that depend on thriving local economies born of the boom environment, however, sometimes do rely on smaller institutions for their financial needs.

But correlation does not necessarily equal causation. While communities that rely on energy production could suffer from job losses and lower capital expenditures, the banks in which StoneCastle invests are not going to fail due to the oil shock, according to Wunderlich Securities analyst Merrill Ross.

Ross called it “illogical” to assume that StoneCastle’s shares have suffered due to the commodities slump and instead pointed to the capital raise and the fact that its greenshoe was immediately sold. That started a cascade effect, she explained to SNL, and with little institutional ownership, there was nothing to halt the slide. Other investment companies, especially business development companies, were also hit late in 2014 as individual investors got involved in year-end tax loss selling. Ross expects many of those stocks to snap back in the first month of 2015. She holds a “buy” rating on StoneCastle and said the recent decline represents a “great opportunity to buy something with a very stable dividend.”

Keep reading the full report and analysis here:

Referenced Tickers: FDTC, PRGX, MA, HPY, HAWK, PLUS, FSC, Fidelity Financial Corp., Community First Bancshares Inc, IT, LEAF, RATE, SLH, PAYX, TREE, SSNC, BANX, BNCC, FSFR, WEX, MicroFinancial Inc., V, PFMT, CRMT, EFC, ARR, MGI, FULL


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