A sizable majority of oil and gas companies and lenders expect borrowing bases to slide by at least 20% after the recent free-fall in oil prices with 45% of respondents predicting even deeper cuts of 30% or more, according to survey results released Wednesday by Haynes and Boone.
The survey included 207 responses from oil and gas producers, oilfield services companies, financial institutions, private equity firms and professional services providers between March 8 and March 25, which the firm noted was after the commencement of the Russia–Saudi Arabia oil price war and acceleration of COVID-19 concerns in the U.S.
The results contrast with this past fall’s survey, which found the largest share of respondents (40%) expected borrowing bases to decrease by only 10% during the redetermination season.
Haynes and Boone also asked top energy banks about reserve-based lenders’ oil and gas price decks starting in mid-February and again after the announcement of price cuts by Saudi Arabia. The firm found the average base case for oil post-crash is 15.6% lower than in the fall and the average base case for natural gas post-crash is 12.3% lower.
The survey also found that oil and gas producers are entering the downturn relatively well-hedged, raising a question about whether they will keep the hedges in place to preserve cash flow or immediately monetize them to enhance liquidity.
Producers also are expected to use cash flow from operations as their primary sources of capital this year followed by debt from alternative capital providers as the next likeliest source, Haynes and Boone said.
Buddy Clark, co-head of the firm’s energy practice group in Houston, told The Texas Lawbook that the survey and price deck are just data points and that it’s difficult to make any informed predictions with the markets going up and down.
“But what is painfully clear is that prices have fallen precipitously, more so than they did at the end of 2014 that started this current downturn for the industry,” he said.
Clark said if banks reset borrowing bases this spring, it will be for borrowers that have strong balance sheets, very little drawn under their facilities and are well hedged. But for companies that are stressed, maxed out on their credit lines and naked to price risk, he expects their banks will want to delay as long as possible resetting the borrowing base at any levels below the producer’s current loan outstandings.
“Once a company gets a lower BB [borrowing base] that is below outstandings, it creates a BB deficiency that must be repaid within six months,” he said. “Typically, this will trigger the producer to file bankruptcy because it has exhausted its attempts to refinance its debt under any acceptable terms. The only place to go is the bankruptcy courts.”
Because banks aren’t interested in taking over oil and gas companies, either through foreclosure or swapping debt for equity, Clark thinks they will be reluctant to push companies by resetting borrowing bases when the markets are in so much flux. “It may be not until early summer before some spring BB are finally reset,” he said.
Clark noted that many companies were already in distress before March and that in this current market, their creditors – other than the first lien banks – are likely to pull the plug and push them into bankruptcy.
“Firms like Haynes and Boone that have deep bench strength in both oil and gas and in restructuring are going to stay very busy this year as everything from loans to contract obligations to litigation gets sorted out,” he said.