Oil Patch Borrowing Base Shrinks as Banks Get Tough This Spring

  • S&P's Watters sees reductions of 30 percent on average
  • Raymond James expects average cuts of 20 to 30 percent

Banks that kept the spigots largely open to U.S. oil producers in the fall are being much less lenient as they review credit lines this spring.

The revisions have only begun but several producers have already seen steep cuts in their borrowing base, with the average reduction from fall levels at 24 percent for eight borrowers, according to data compiled by Bloomberg. Whiting Petroleum Corp. saw a 31 percent reduction to $2.75 billion, while W&T Offshore Inc. had its base slashed 57 percent to $150 million. Others, including Energy XXI Ltd., California Resources Corp. and Sanchez Energy Corp. saw declines between 20 and 30 percent.

"Depending on the outcome of this process, we could see the spring redetermination pushing some companies over the financial cliff and into bankruptcy or some form of corporate restructuring," Raymond James analysts Kevin Smith and Graham Price said in a research report.

The cuts are in line with expectations. Spring reductions may average up to 30 percent, according to Raymond James and Standard and Poor’s. The tightening stems from dwindling crude reserves, low prices and regulatory scrutiny over banks’ exposure to energy. Smaller companies will be hit the hardest, said Thomas Watters, managing director of S&P’s oil and gas group.

"Size does matter in this industry, and you see that playing out in this kind of downturn," Watters said.

‘Even Longer’

Banks are being stricter partly because oil and gas prices are lower than they were six months ago, but also because of a changed mindset among industry leaders and lenders who expect a "lower for even longer" environment, said Spencer Cutter, a Bloomberg Intelligence analyst. Bigger companies will be able to absorb the cuts better because of larger portfolios and a greater chance of being able to sell assets if needed to pay down debt, he said.

"The bigger guys have more room to maneuver and more levers to pull," he said.

More broadly, the prolonged slump likely means banks need to be more aggressive in managing loan exposure to the energy industry. Part of the spring season cuts may compensate for last fall. Despite expectations of reductions between 10 percent and 20 percent, they averaged about 5 percent, according to Bloomberg Intelligence.

"People expect to see more action today partly because of relative inaction six months ago," Cutter said. "When oil dropped below $30, banks might think they can’t kick this can down any further."

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