Oil Prices Are Burning Chase & The Financial Sector

Oil Burns JPMorgan Chase (JPM)

Stunningly-weak oil prices have claimed another victim, adding to a list that already consists of Chesapeake Energy (CHK), Marathon Oil (MRO), and dozens of other underwater oil names... some of which have already been forced into outright bankruptcy. That latest victim of the oil and gas implosion, however, isn't a gas and oil stock. It's a bank... JPMorgan Chase & Co. (JPM), to be specific. After more than a year of debilitatingly low oil prices, the energy companies it made loans to are now defaulting on those loans, in bulk.  Those losses eat into the bottom line for JPMorgan Chase and others in the Financial sector (XLF) and Banks (KBE) (KRE).

The announcement came  on Tuesday morning at JPMorgan Chase's analyst day... the company has earmarked $500 million for bad oil loans this year. That's on top of the $800 million it set aside to cover energy-related losses in 2015.

And that provision could swell before it's all said and done. JPMorgan added that almost 40% if its loan portfolio are loans made to the energy sector.

As for how bad it could get, JPMorgan Chase & Co. has calculated that if crude oil prices linger at $25 per barrel through the latter half of 2017, it would need to add another $1.5 billion to its loan loss reserves. Fortunately, most analysts and observers believe oil will start to recover sooner than later, if only because so many producers are in or nearing bankruptcy proceedings, and many of have curtailed production simply because they have to.

For perspective, JPMorgan Chase & Co. earned $21.7 billion on $91.1 billion in revenue in 2014, before the implosion of crude oil impacted bank loans to drillers, explorers, and producers. Over the past four quarters, JPMorgan has earned $22.4 billion on $89.7 billion. Those numbers don't include the company's fourth quarter results, however , which is when the impact of low oil prices should start to become evident.

JPM shares are off 18% from their November high, though the stock's still got a backstop of technical support lines near $54.26 and $50.09. And, with a P/E of 9.4 and a forward-looking P/E of 8.5, the impact of the oil-driven loan losses may already be factored in.