BlackRock’s Fink says up to 400 energy companies could fail

BlackRock founder Laurence Fink has never seen anything like this before.

“In my 40 years of being in the business, this is the first time people have said lower energy prices are bad,” Fink told the New Jersey State Investment Council on Wednesday, January 27. “Historically, lower energy prices are better for consumers.”

Fink, whose firm manages $900 million of private equity separate accounts for New Jersey’s $74.2 billion pension system, was invited by the state’s Division of Investment to offer his perspective on the market at its annual meeting.

Cost savings associated with lower energy costs were a boon to U.S. consumers in the past, Fink said. However, explosive gains in the domestic oil and gas industry over the last decade transformed the U.S. into the world’s largest producer of oil and gas, which exposes a broader swath of the economy to the downside of falling commodity prices.

Globally, Fink expects around 300 to 400 energy companies to fail if oil and natural gas prices remain depressed.

“Fracking technology, radiology of the earth [and] imaging technology … allow us to find more carbons and extract those carbons for cheaper than ever before,” Fink said. “The reality is, carbons are going to be cheaper for longer and that’s starting to become more and more of the market’s understanding.”

With oil trading at more than $100 per barrel for most of the last five years, many oil companies structured their debt to handle prices as low as $40 or $50 per barrel, Fink said. But even those prices werent low enough, as overproduction swelled supply, pushing the price of Brent crude below $28 per barrel on January 18, its lowest level since 2003.

As of January 28, Brent crude sold for approximately $34 per barrel. Natural gas prices also fell dramatically over the last year.

Steep reductions in energy prices, along with economic unease in China, are often cited as the primary factors for the market’s volatility through January. Those dynamics could contribute to slower growth in the coming years, Fink said.  

“I’m not saying the world is falling out of bed, or that China is falling out of bed, or that it’s a deep dark black hole. But it’s not as good as it was,” Fink told the council. “I do believe we’ll have global growth at 2.5 to 3 percent.”

Fink declined to comment further following his remarks.

Action Item: To learn more about BlackRock, visit www.blackrock.com

Photo: Laurence Fink, Chairman and CEO of Blackrock Inc, gestures at the World Economic Forum in the Swiss mountain resort of Davos January 24, 2015. REUTERS/Ruben Sprich