Bank borrowing review season likely sees little movement in credit lines: experts

Updated bank credit lines for upstream companies for early 2019 may not only remain flat or slightly increased from last year, but access to capital markets could be less crucial to them since most have recently pledged to limit their spending to cash flow, industry experts say.

Right now, E&P producers are in the talking stage with lenders – a formal twice-yearly process that occurs in April and again in October, to determine the creditworthiness of oil company borrowers.

Oil and natural gas reserves are a major lending criteria, along with current oil prices and the forward strip, but lenders also consider other factors such as producers’ hedges, debt, current production and near-term output targets.

“Despite the decline in oil prices in the fourth quarter, we are not expecting borrowing bases to decline much,” said Tom Watters, managing director for S&P Global Corporate Ratings. “If they do, it will be only slightly.”

Moreover, oil and gas producers have a “decent amount” of hedges in place for 2019, Watters said.

Producers have hedged 31% of their oil on average for this year, about the same amount as in 2014 (30%), 2015 (29%), and 2016 (32%) – but less than the 51% last year and 38% in 2017, according to a report last week by Goldman Sachs.
PRODUCERS ‘UNDERHEDGED’ FOR 2020

Goldman Sachs also found producers generally “underhedged” for 2020 at 6% currently versus 4% after the Q3 2018 financial reporting season.

The bank noted that many companies revised their production growth estimates lower with Q4 2018 results, and that the majority of production growth the investment bank expects this year comes “almost equally from relatively unhedged and well-hedged E&Ps.”

Moreover, a “near-term positive oil macro commentary is the likely driver behind lower producer hedging levels,” the bank added.

According to international law firm Haynes and Boone’s twice-yearly energy borrowing base redeterminations survey released earlier this month, about 40% of oil and gas company producers, financial institutions, private equity firms oilfield services providers and related companies polled expected upstream borrowing bases to remain the same.

Another 30%-plus expected slight declines and more than 20% anticipated slight increases, the survey found.

But the poll was conducted in February, and since then oil prices have risen, Haynes and Boone partner Buddy Clark noted. As a result, “we’re seeing now borrowing bases in April with some increases of around 10%,” Clark said.

“I bet we’ll find out in May and June that borrowing bases for more than half the companies will probably go up, all things being equal and if oil prices stay the same as they are now,” he added.
BORROWING BASES COULD INCREASE IF CURRENT OIL PRICES HOLD

Interestingly, the Haynes and Boone survey also found that capital markets, both equity and debt, have fallen “significantly” out of favor as sources of capital, while showing “increased interest” in raising funds through other means.

These alternatives typically involve joint ventures — farmouts, for example, or so-called “DrillCos” where an investor funds part of costs in exchange for a percentage interest in acreage or wells.

Interest in borrowing base redeterminations began to be closely watched during the last industry downturn that began in early 2015 when oil prices eventually plummeted to more than 70% of their mid-2014 levels above $100/b.

From 2015 through 2018, a total of 167 North American upstream producers filed for bankruptcy, according to Haynes and Boone’s latest Oil Patch Bankruptcy Monitor. Collectively, they represented debts of nearly $96 billion.

The majority (114) occurred in 2015-2016, the worst years when oil price swings were the sharpest, but 29 occurred last year when oil averaged more than $60/b for much of the year.

WTI oil prices are now again in the low $60s/b WTI, while Brent is in the high $60s.
Source: Platts