For the first time in three years, oil and natural gas producers are expected to see their borrowing bases decline as credit availability contracts on a worsening outlook for commodity prices, according to a survey of 221 industry respondents conducted last month by Haynes and Boone LLP.

The survey polled producers, energy lenders, oilfield services companies, private equity firms and other stakeholders heading into the fall redetermination season, the second time each year when lenders determine how much credit will be available for exploration and production (E&P) companies.

The majority of respondents in the latest survey expects to see decreases, with the largest segment of those surveyed, or about 40%, expecting borrowing bases to decline by 10%. The law firm’s last survey earlier this year ahead of spring redeterminations found 40% of respondents expected no significant change.

“The fall borrowing base survey clearly indicates that reserve-based loan capital is becoming constrained,” said Kraig Grahmann, who leads the firm’s energy finance practice group. “E&P companies will remain boxed in on capital sources for a while.”

The amount of borrowing bases depends heavily on forecasted prices of oil and gas reserves that are compiled by banks. A separate survey of the lenders’ price decks conducted by Haynes and Boone shows oil prices declining by 1.4% and natural gas prices declining by 6.5% compared to last spring’s forecasts.

One thing has become clear this year as commodities have seesawed and the upstream sector has faced pressure on a variety of factors: funding for E&Ps is drying up. Only 2% of respondents expect producers to receive equity from capital markets, while 3% said they expect them to receive debt from capital markets.

“Utilization of public debt and equity capital markets as a source of capital for producers has gone from small in the spring 2019 survey to miniscule in the fall 2019 survey,” Grahmann said.

In fact, 47% of respondents said they don’t expect producers to have adequate access to public equity markets until 2021 or later, with most of next year’s upstream funding expected to come from bank debt and cash flow from operations. Private equity, joint ventures and other capital sources are expected to provide much of the rest.

The growth-at-all-costs strategies that have defined most of the shale era have ended as more disciplined operations are expected. Investors are demanding better returns via stock buybacks and/or by establishing a sustainable dividend.  They're pushing producers to improve cash flow.

"Increased hedging levels indicate producers are being more aggressive in protecting that cash flow from commodity price volatility," Haynes and Boone said.