By September 21, 2015 Read More →

O&G producers’ borrowing against reserves chopped 39% in Oct.? – survey

Some producers are probably too highly leveraged to survive the borrowing cut, says economist Ed Hirs

As the fall banking review of oil and gas company credit fast approaches, a new survey shows that most expect borrowing against reserves to be reduced by an average of 39 per cent.

borrowing

Image by © Craig Aurness/CORBIS

The survey by Haynes and Boone, LLP was conducted prior to the fall borrowing base redetermination season. A similar survey conducted during the spring found  the same borrowers and lenders believed there would be an average of a 25 per cent decrease in borrowing bases, reflecting financial woes after the price of oil dropped below $50/b.

“What really stood out to us was the contrast between the results of the spring and fall survey,” said Houston Partner Jeff Nichols.

“In the spring, it looked like the response was a ‘wait and see’ mentality. But with fall approaching, the ‘wait and see’ mentality seems to have passed and there is recognition that more action is needs to be taken to reduce debt through equity investment, restructuring or even declaring bankruptcy.”

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Jeff Nichols, partner, Haynes and Boone LLP.

The survey shows that the percentage of borrowers predicting a base decrease has grown from 68 per cent in the spring to 79 per cent in the fall,  according to a Haynes and Boone press release.

The fall survey was compiled from 182 responses received from a wide range of oil and gas professionals in Sept. About 40 per cent are executives at oil and gas companies, including upstream, midstream, and oilfield services, 40 per cent are financiers from commercial and investment banks and private equity firms, and 20 per cent are professional services companies and others.

Nichols said most producers have already begun to reduce discretionary capital expenses and negotiate with their oilfield service providers. Until prices rebound, producers will need to live within cash flow.

“If that means farming out or selling undeveloped acreage that’s better than letting it expire for lack of operations,” he said. “Begin considering alternative means of revenue and cash flow outside of your producing reserves.  Producers can look to other assets that they may own that do not contribute to their borrowing base such as drilling and production equipment, midstream assets, and undeveloped reserves.”

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Ed Hirs, energy economist, University of Houston.

A shakeout in the shale oil patch was inevitable, says Ed Hirs, a University of Houston energy economist and also the managing director of Hillhouse Resources. Too many companies overpaid for acreage and didn’t have the expertise to economically produce in a shale play.

“Those producers who were really good upfront with their geology and engineering and were ahead in the game in terms of requring perspective acreage, they are gonna have lower costs and production than producers who were late to the game,” Hirs said in an interview with American Energy News.

Hirs expects to see significant mergers and acquisitions over the next 6-12 months as borrowing is cut and some of the highly leveraged producerfs have to sell theire best assets in order to continue.

Buddy Clark, chair of the Haynes and Boone energy practice, says that assets can be monetized through a variety of transactions such as a sale and leaseback or farmout agreement. He noted that in survey last spring 19 per cent of respondents were expecting to skip the spring borrowing base redetermination.

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Buddy Clark, chair of the Haynes and Boone energy practice.

“In our experience that was an optimistic expectation,” Clark said. “Last spring we saw very few banks electing to skip the borrowing base redeterminations. Many lenders, instead of skipping the borrowing base redetermination, where they could justify it, were able to reaffirm the borrowing base values for their customers. In comparison to what happened in the spring, responses this fall show that folks in the industry expect lenders more producers to see decreasing borrowing base amounts than last spring.”

Clark said the most important issue is how to get through this price decline without negating everything that has been built up in the last decade in the oil and gas industry.

“Understanding that the ups and downs in oil and gas prices are cyclical, the industry needs to react knowing that this period will pass,” Clark said.

“We don’t know how long it will take, but we do know that at some point, prices will rise and the industry will bounce back. When regulators are pressuring banks to clean up their energy portfolios, they should be taking this into consideration. If financiers have confidence in the rise in oil and gas prices, they should be looking for opportunity to provide financing to producers for bottom dollar now with confidence that they will come out on top.”

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