Reckoning Arrives for Cash-Strapped Oil Firms Amid Bank Squeeze

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Banks Cutting Back Credit Lines to Oil Companies

Lenders are preparing to cut the credit lines to a group of junk-rated shale oil companies by as much as 30 percent in the coming days, dealing another blow as they struggle with a slump in crude prices, according to people familiar with the matter.

Sabine Oil & Gas Corp. became one of the first companies to warn investors that it faces a cash shortage from a reduced credit line, saying Tuesday that it raises “substantial doubt” about the company’s ability to continue as a going concern. About 10 firms are having trouble finding backup financing, said the people familiar with the matter, who asked not to be named because the information hasn’t been announced.

April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend. And that will only squeeze companies’ ability to produce more oil.

“If they can’t drill, they can’t make money,” said Kristen Campana, a New York-based partner in Bracewell & Giuliani LLP’s finance and financial restructuring groups. “It’s a downward spiral.”

Bigger Cuts

Sabine, the Houston-based exploration and production company that merged with Forest Oil Corp. last year, told investors Tuesday that it’s at risk of defaulting on $2 billion of loans and other debt if its banks don’t grant a waiver.

Publicly traded firms are required to disclose such news to investors within four business days, under U.S. Securities and Exchange Commission rules. Some of the companies facing liquidity shortfalls will also disclose that they have fully drawn down their revolving credit lines like Sabine, according to one of the people.

The credit discussions are ongoing and a number of banks may opt to be more lenient, giving companies more time to prepare for bigger cuts later in the year, the people said. Credit lines for some of the companies may be reduced by as little as 10 percent, they said.

The companies are among speculative-grade energy producers that were able to load up on cheap debt as crude prices climbed above $100 a barrel. The borrowing limits are tied to reserves, the amount of oil and gas a company has in the ground that can profitably be extracted based on its land holdings. With oil prices plunging below $50 from last year’s peak of $107 in June, some are now fighting to survive.

Borrowing to Drill

Those loans are typically reset in April and October based on the average price of oil over the previous 12 months. That measure has dropped to about $80, down from $99 when credit lines were last reset.

That represents billions of dollars in reduced funding for dozens of companies that relied on debt to fund drilling operations in U.S. shale basins, according to data compiled by Bloomberg.

All of this means that the squeeze happening now will only get worse as companies’ hedges against price declines start to roll off, said Bracewell & Giuliani’s Campana.

“People are expecting a much bigger rush of restructuring and negotiations in the fall,” she said in a telephone interview Tuesday.

Raising Cash

Samson Resources Corp., an oil and natural gas producer controlled by private equity firm KKR & Co., warned investors that bankruptcy may be its best option as collapsing crude prices erode its ability to repay debt.

Its borrowing base may be reduced due to weak oil and gas prices, requiring the company to repay a portion of its credit line, according to a regulatory filing on Tuesday. That could “result in an event of default,” Tulsa, Oklahoma-based Samson said in the filing.

Many producers have been raising money in recent weeks in anticipation of the credit squeeze, selling shares or raising longer-term debt in the form of junk bonds or loans.

Energy companies issued more than $11 billion in stock in the first quarter, more than 10 times the amount from the first three months of last year, Bloomberg data show. That’s the fastest pace in more than a decade.

Breitburn Energy Partners LP announced a $1 billion deal with EIG Global Energy Partners earlier this week to help repay borrowings on its credit line. EIG, an energy-focused private equity investor in Washington, agreed to buy $350 million of Breitburn’s convertible preferred equity and $650 million of notes, Breitburn said in a March 29 statement.

‘Somewhere Else’

Standard & Poor’s had warned in January that it might downgrade Breitburn’s ratings over concerns the Los Angeles-based oil producer would see cash shortfalls when its borrowing base is revised in April. Breitburn’s credit line was cut 28 percent to $1.8 billion and outstanding borrowings will be reduced to $1.24 billion with proceeds from the deal with EIG, according to the statement and Bloomberg data.

“Banks are not in the business of lending to distressed companies,” Campana said. “Most of the banks want to be refinanced or they want to see the money come from somewhere else.”

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