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Borrowing bases for US oil and gas firms could take a hit

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BloombergTroubled oil and gas companies may have a hard time persuading their banks to keep extending credit as the outlook darkens for energy, potentially leading to more bankruptcies in the already-beleaguered sector.

Lenders evaluate the value of oil reserves used as collateral for bank loans twice a year, a process that’s not likely to go well amid weak commodity prices, falling demand, shuttered capital markets and fears of coronavirus dampening global growth. Banks may cut their lending to cash-starved energy companies by 10% to 20% this spring, according to investors and analysts.

“Things are so bad right now,” Shaia Hosseinzadeh, founder of OnyxPoint Global Management LP, an energy-focused investment firm, said in an interview. “The banks can kick the can down the road and say ‘there’s no point of pushing everybody into bankruptcy, we’ll wait until October.’”

“But if it’s business as usual, it’s going to be a horror show,” Hosseinzadeh said.

Shale Sorrow

Spring Discussions

Banks could use spring borrowing base conversations to limit their exposure to some of their more troubled borrowers, according to a Bloomberg Intelligence note. More than one-third of high-yield energy debt is trading at distressed levels. Oil and gas producers with bonds trading with double-digit yields include California Resources Corp., Range Resources Corp., Southwestern Energy Co., Antero Resources Corp., Comstock Resources Inc., Extraction Oil & Gas Inc. and Oasis Petroleum Inc.

Representatives for Range Resources and Comstock Resources pointed to previous comments made by executives on fourth-quarter earnings calls that they were expecting favorable discussions with their banking syndicate, for reasons including positive free cash flow, low costs, and adequate room on their existing borrowing base and credit facilities.

Representatives for the other companies didn’t immediately respond to requests for comment.

Energy bankruptcies reached their highest level last year since 2016 as investors who previously agreed to amend-and-extend their credit ran out of patience. The sector hasn’t seen a meaningful recovery since the last downturn began nearly five years ago, and many private equity firms have shied away from financing the industry at the levels they did prior to 2015.

For only the fourth time in nearly 40 years, global oil consumption may not grow at all in 2020 because of the coronavirus. Paul Sankey, an analyst at Mizuho Securities, said that as much as four million barrels a day of oil demand has been wiped out. Supply and demand in the global oil market may not get back into balance until late 2022, according to Neal Dingmann, an analyst at Suntrust Robinson Humphrey.

Lenders are wary because they have less protection than in the last energy slump. Back then, unsecured debt absorbed losses in restructurings, and was often converted to equity; banks were mostly unscathed. With that insulating layer of junior debt gone, there’s no cushion left, and some top-seniority loans have become impaired, such as in Alta Mesa Resources Inc.’s bankruptcy.

Banks wrote off as much as $1 billion in 2019 in reserve-based shale loans, more than they have in 30 years of making them, according to Mike Lister, an energy banker at JPMorgan Chase & Co. That trend could last the rest of 2020, he said.

Picky Lenders

Lenders should have been more stringent about making borrowers hedge their production, and they should’ve been less willing to grant standard covenants and fairly generic reserve-based loan terms, he said.

“You’re going to see a lot more differentiation on structure, pricing, capacity in the market,” Lister said. “It’s going to be driven by client scale, the basin they’re in, their leverage, liquidity, their current market value assets.”

Ultra Petroleum Corp. could be a harbinger for the weakest companies. The natural gas producer, which filed for bankruptcy in 2016, saw its borrowing base reduced to $1.075 billion, from $1.175 billion, with its credit line lowered to $100 million from $200 million. What’s more, its banks demanded quarterly redeterminations, according to a statement. Ultra suspended its drilling program in September and is evaluating strategic alternatives.

Ultra Petroleum didn’t immediately respond to a request for comment.

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