Shale Borrowers Buy Time as Banks Go Easy on Credit Line Cutsby and
Jefferies predicts tougher E&P loan reviews in April 2016
'Banks support customers (for now)' Jefferies says in report
The day of reckoning for many debt-heavy oil drillers has been postponed as lenders are giving energy producers more time to cut costs and raise cash.
Lenders are in the midst of the second semi-annual review of producer loans, and so far cuts to borrowing limits have been "surprisingly gentle," according to a report Monday from Jefferies Group. SandRidge Energy, Inc., whose shares have declined 80 percent this year, was the latest to announce that its borrowing limit will remain unchanged at $500 million.
“It looks generally to me like it’s a sort of kick the can down the road approach that’s being taken at this point,” David Lesar, chairman and chief executive officer at Halliburton Co., the second-biggest oilfield services company, said during a conference call on Monday. “That really just pushes the day of reckoning into sort of the first quarter of next year.”
Companies including Ultra Petroleum Corp., PDC Energy Inc., Rex Energy Corp. and Abraxas Petroleum Corp. saw no change in the amount they can draw, while Callon Petroleum Co. and RSP Permian Inc. saw their credit lines increased.
Bank credit lines are a crucial source of liquidity for shale drillers hard hit by oil’s 44 percent decline in the past year. Companies have cut spending and laid off thousands of workers, and still outspent cash flow. Of the 61 companies in the Bloomberg Intelligence North American Independent Explorers & Producers index, 55 spent more money on drilling in the second quarter than they earned selling oil and natural gas.
"We think that banks are generally giving producers more time to improve financial health and that spring ’16 redeterminations could be much tougher without significant commodity price improvement," said Jefferies analysts led by Jonathan Wolff in the report.
Junk-rated oil and gas producers have landed low-interest loans by putting up their producing wells and prospective acreage as collateral. Banks typically reevaluate that collateral twice a year around April and October, and borrowing limits rise and fall based on a lenders’ price outlook and on how many new barrels of reserves were added since the last review.
The risk is that those credit lines can shrink when prices fall, which is just when drillers need the money most.
Drilling cutbacks mean companies are adding to reserves at a slower pace. Meanwhile, the price outlook for oil and gas has declined sharply. Banks are reassessing loans using $48.17 a barrel for U.S. benchmark West Texas Intermediate crude compared with $81 a year ago, according to a quarterly survey from Macquarie Group Ltd.
While some borrowers have escaped cuts in this review period, others haven’t been as fortunate. SM Energy Co., Oasis Petroleum Inc. and Emerald Oil Inc. have had their credit lines reduced. Emerald’s lenders lowered its borrowing limit to $120 million from $200 million, leaving the company overdrawn by $19.6 million. The Denver-based driller, which outspent its cash flow by $48 million in the second quarter, said it is working with lenders to structure a repayment plan.