Energy Lenders Slowly Loosening Grip on Dollars
In the wake of last year's oil bust, energy industry lenders are
still keeping a tighter grip on their money. However indications
are some banks and investors are starting again to look for places
to put capital in the energy patch.
Considering speeches given by banks, mezzanine debt and private
capital sources at Gas Daily's Upstream Finance conference last
week in Houston, it would seem capital is readily available to
producers right now. However, like producers, lenders have been
chastened by the recent crisis in oil prices. Tim Murray, senior
vice president energy group manager for Wells Fargo Bank, noted
trends in the commercial bank market.
Spreads have stabilized, and there is a return to a historical
premium for loans to producers, he said. The number of deals is
down, and credit structures have been tightened. There is less
liquidity in the syndicated loan market and an increased focus on
"sensitivity" analyses. Lenders also have placed a renewed focus on
current producer cash flow versus borrowing base values.
Murray also predicted what is to come for bank energy lending.
Spreads will include an industry premium. As major producers divest
themselves of domestic assets the volume of deals will increase.
Credit structures will remain tight, and liquidity will improve in
the syndicated loan market as new players emerge. There also will
be a renewed focus on commodity hedges.
Last year's major oil price decline made public markets tight
for smaller producers, noted Robert Zorich, managing director of
EnCap Investments. Banks retrenched, and producers found themselves
de-leveraging rather than drilling. He predicted major
recapitalizations and consolidations will continue. While prices
are rebounding, the industry and lenders need time to become
Formed last year, mezzanine lender Shell Capital has a number of
criteria that must be met before it will loan to producers, said
Michael Keener, Shell Capital vice president for business
development. The company is looking for deals worth $10 million and
up, and the more the better. Shell will provide up to 90% of
project funding and wants to provide 100% of development capital.
"We want to make sure you have the capital. If we're going to go
into a project, you're going to have the capital to do the project,
so we want to pay for that and get you all that money just be sure
it will happen. We don't want economics at a later date to impede
the project." Shell also requires producers to hedge. "We want you
to hedge, and we will recommend what we think is the right amount
Private capital financing comes in when a company has
insufficient cash flow to support bank financing, is fully
leveraged, has an aversion to recourse debt, or desires more
flexibility in debt structure," said Gary Tanner, vice president of
private lender EnCap Investments, which was recently acquired by El
Paso Energy. Public capital might be unattractive to a company
because of an unreceptive market, an unwillingness to become a
public company, or the need for quick transaction turnaround.
Private capital lenders take a longer-term outlook than banks
and are less reactive to market downturns. Deals can close quickly
and there are capabilities for creative structuring. A private
capital lender brings energy expertise to a producer as well as
market analysis and insight. All this has its price, though.
Private lenders want higher returns, and it's possible to lose
control of one's company to a private lender.
When producers get in trouble it is usually the result of one or
more factors, said Bart Schouest, managing director with Banque
Paribas. Putting a producer's back to the wall can be declining
prices, poor drilling/development results, problems with cost
control and capital structure challenges. When a company finds
itself in trouble, action must be taken. Bankers aren't satisfied
to wait around for prices to improve, Schouest cautioned. Steps to
take include the development of a comprehensive restructuring plan
with reasonable expectations. Borrowers should be prepared to
restructure bank debt. Among other actions, a non-core divestiture
program should be outlined; commodity hedging should be evaluated;
operating costs should be cut and production maintained.
Joe Fisher, Houston