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Many E&Ps Still Accessing Capital Markets, With Cuts 'Relatively Light,' Fitch Says

The sky-is-falling scenario that producers were expected to face as crude oil prices collapsed last year has yet to make a big dent in lending, according to Fitch Ratings.

Cuts to reserve-based lending facilities (RBL) of high-yield (HY) exploration and production (E&P) companies by bank syndicates have in fact been "relatively light," the credit ratings agency said in a note.

Fitch analysts reviewed a sample of 25 HY E&P issuers with more than 50% liquids exposure as of early December and found that the average borrowing base reduction was 19% versus year-end 2014 levels. The reduction is "substantially lower" than the drop in spot oil prices, down 60%, and forward oil prices, off 50%, over the same period. Almost three-quarters (72%) of the Fitch-defined sample had reductions, while the remaining 28% saw their bases either affirmed or they were increased, mostly because of acquisitions.

"Asset sales and capital markets transactions provided important lifelines for high-yield E&P companies this year and have helped many banks to manage their exposure to the sector and to individual names," Senior Director of Corporates Mark Sadeghian said. "Opportunities for banks to further manage their exposure to HY E&Ps in 2016 will continue to be highly dependent on borrowers' ability to access the capital markets."

Across the Fitch sample, 17 (68%) tapped capital markets in one way or another, "through equity, preferreds or second/third lien debt," while 12 sold assets. In many cases, proceeds were used to  take down short-term bank exposure by repaying revolver borrowings or to reduce longer term exposure through a step-down in lender commitments.

Access to capital markets varies by issuer. Many HY deals took place in a relatively short window in the second quarter, Fitch noted. Since then, deteriorating energy fundamentals have resulted in markets closing for many companies (see Shale DailySept. 18Feb. 24).

"Worsening sentiment around crude oil fundamentals in December and the bond market liquidity crunch among HY E&P companies may leave banks in it for the long haul, with fewer options for lowering their exposure if lower-for-longer persists," said Fitch's Christopher Wolfe, managing director of financial institutions.

Redeterminations by lenders are conducted twice a year, reducing the size of credit lines to E&Ps and revolver pay-downs on RBLs, "have been the primary tools for banks to manage their lending exposure. But there could be some additional criticized assets as oil and gas producer hedges roll off in 2016, and there will likely be continued pressure on oil field services loans," according to the credit ratings agency.

Hedging has been an "important credit mitigant for HY E&Ps this year," but "the lack of opportunities to hedge production at full-cycle costs since the downturn suggests the value of hedging to prop up borrowing base values may diminish significantly unless the market turns around."

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