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E&P Spring Redeterminations Follow Mediocre 4Q Results, Oil Price Decline

U.S. producers are likely to face a “conservative but not knee-jerk response” by banks as they begin spring borrowing base redeterminations, according to a survey by Haynes and Boone LLC.

The law firm’s Spring 2019 Energy Roundup issued this week compiled responses to its borrowing base redeterminations survey, which exploration and production (E&P) companies face twice a year as banks review their debt levels.

Redeterminations for the spring are following somewhat mediocre earnings results for 4Q2018 following the drop in oil prices late last year. The survey, the ninth by Haynes and Boone since April 2015, polled E&Ps, energy lenders, private equity firms and other industry participants for insight into future borrowing capacity, i.e., the borrowing base.

The latest survey “reflects a sense of relative calm in the reserve-based lending world despite the 2018 oil price declines,” the firm said. About 40% expect borrowing bases to remain the same, while more than 30% predicted slight declines to borrowing and 20%-plus expect to see slight increases. 

“The consensus view appears to be that banks will not take a knee-jerk reaction to last year’s price declines,” said Haynes and Boone’s Kraig Grahmann, head of the Energy Finance Practice Group. “Producers have hedged a significant amount of their 2019 production, 40-60% according to the survey, which may explain why respondents expect borrowing bases to remain relatively stable.”

Respondents also indicated that capital markets for equity and debt “have fallen significantly out of favor as sources of capital...There is increased interest this year in sourcing capital through joint ventures, such as farmouts, ‘drillcos,’ etc.”

A drillco is a creative financing device used by E&Ps and investors to help pay for expenses and development costs, sometimes referred to as carrying costs. Often an investor participates in a well or a leasehold by providing capital to pay a share to drill and complete specific wells and/or to pay for a share of development costs.

The survey also found that most respondents do not expect recent commodity price volatility to cause more bankruptcies in the oil and gas sector. However, this year may prove difficult for companies attempting to monetize investments.

During 2018, about 40 companies in the oil and gas industry filed bankruptcy in the United States, including companies engaged in E&P, oilfield services and midstream services, Haynes and Boone noted. Of those that sought to reorganize under Chapter 11, many were able to fund their cases using cash on hand, while protecting secured creditors with liens on “cash collateral.”

“The significant number of cases funded with cash collateral suggests that many companies in the oil and gas industry that filed bankruptcy in 2018 were not facing liquidity crises at the time of filing.”

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