Banks that lend to natural gas and oil producers have substantially raised their price expectations for both commodities, according to the latest biannual Energy Bank Price Deck Survey conducted by Haynes and Boone LLP.
The law firm conducts spring and fall editions of the survey each year to capture the expectations of energy banks for natural gas and oil prices, aka their price decks. The price decks are a principal factor used by the banks in determining oil and gas producers’ borrowing bases, such as the amount of credit a lender is willing to extend to a producer, said Haynes Boone.
For the near term, i.e. through 2024, average base case natural gas prices predicted in the fall 2021 survey rose by 28% from spring 2021.
“Like weather forecasts, price decks typically are more accurate in the near term, and our latest survey shows particular optimism about rising oil and gas prices through 2024,” said Haynes Boone Partner Buddy Clark.
Respondents forecasted Henry Hub prices of $3.51, $3.08, $2.75 and $2.64/MMBtu for 2021, 2022, 2023 and 2024, respectively.
This is up from $2.53, $2.42, $2.36 and $2.38 forecasted in the spring survey.
For 2025-2030, forecasts trend closer to the Spring projections, but are still about 20 cents/MMBtu higher on average for each year.
Clark noted that the latest survey shows a wide variation among the banks on how they think oil and gas prices will move over the coming years. As a result, “producers should consider shopping around for debt capital, with the caveat that the price deck alone does not determine the borrowing base banks will be willing to lend.”
For West Texas Intermediate (WTI) oil prices, banks have increased their near-term expectations by almost 20% versus the spring survey, Haynes Boone said. For the 2025-2030 period, the average price forecasts track almost 10% higher than the three prior surveys conducted from spring 2020 through spring 2021, the firm said.
These projections should be music to the ears of exploration and production firms, the Haynes Boone team said.
“According to our survey, borrowing bases should be increasing,” said Clark. “This is positive news for producers and reinforces the findings from our fall 2021 Borrowing Base Redeterminations survey, in which most respondents predicted borrowing bases to increase by 10% to 20% in the upcoming redeterminations season.”
The average base case oil forecasts in the fall survey were $3.51, $3.08, $2.75 and $2.64/bbl for 2021, 2022, 2023 and 2024, respectively.
These compare to $2.53, $2.42, $2.36 and $2.38 predicted in the spring survey.
The survey authors highlighted that WTI prompt month prices “have been above the $70/bbl mark for almost two months since the beginning of September, a welcome change from the nadir sub-$20/bbl in the spring of 2020.
“Bankers’ price expectations, as reflected in their oil base case price decks, paint a much rosier outlook for oil prices, especially in the near term from the fall of last year.”
Researchers said that for the pandemic-ravaged spring 2020-spring 2021 period, bank price decks for the out years (2025-2030) “coalesced between $43-$46/bbl. This fall, bank price decks, however, have broken out of this narrow band tracking almost 10% higher, just above $50/bbl by 2030.”
The authors stressed that price decks are not the only factor that banks consider in determining borrowing bases.
“Banks with higher price decks may only give credit for producing wells but require liens on all of the borrowers’ oil and gas properties,” they said. These banks “may require borrowers to lock in a greater percentage of future production under hedges at current prices, which could prevent the company from benefiting from any uplift in prices over the next couple of years.”
The fall survey was based on responses and data from 15 energy banks received by early November of this year.
The survey follows the Energy Information Administration’s latest Short-Term Energy Outlook, which forecasts Henry Hub natural gas prices averaging $5.53/MMBtu during November-February, before declining to an average of $3.93 in 2022 amid higher production and slowing growth in liquefied natural gas exports.
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