June 20, 2019 - On Tuesday, the LSTA hosted the bi-annual energy finance update presented by Jeff Nichols, Kraig Grahmann, Gil Porter, and Katy Shurin, all partners of Haynes and Boone from Houston and New York. Public equity markets have not been kind to the oil and gas companies this year, with E&P stocks suffering and mergers and acquisitions activity virtually non-existent (M&A activity has totaled only $4 billion this year). Prices for crude have also been incredibly volatile lately, experiencing about a drop of about 18% since the last peak in April. Oil companies never want to live in free cash flow, always needing capital to develop their wells, and thus it seems that E&P companies are perpetually starved for capital. Consequently, you may expect those companies to cut production, but because they are great innovators, production continues to rise with no slowdown in sight. Over $300 billion of committed debt is set to mature through 2023, and with the public markets not ready to refinance that debt and bank lenders not stepping in either, E&P companies face an uncertain future.
New technology has been added to reserve base loan credit agreement since the 2015/2016 bankruptcy cycle, including in credit bidding provisions. For example, in today’s RBL credit agreements, the administrative agent now has the right to credit bid the RBL debt in a bankruptcy proceeding or foreclosure proceeding. Here it is critical for parties to review the relevant lender voting requirements for the administrative agent to credit bid and determine the threshold required – is the consent of all lenders or only a majority of lenders required or, although rare, perhaps no lender consent is required for the agent to credit bid. If you are a bank with no interest in, or that is prohibited from, owning equity in an oil and gas company, be aware of this provision and the risk of being dragged along in those types of transactions.
With respect to LNG projects, the good news is that US gas supply is plentiful and a stable price outlook is projected. With respect to LNG export markets, South Korea, Mexico, and China have been the three largest players until 2018, but is forecasted that China and India will become the leaders of that growth. There are risks in North American reliance on exports to China, and the JKM has dropped 60% which has killed most of the commercial reasoning for US LNG sales to China. The Chinese government has also been slow in forcing users to switch from coal to gas, and the Siberian pipeline is due to start up by end of this year. Furthermore, China imposed a 10% tariff in September 2018 in response to failed negotiations and may raise this tariff to 25%. The impact of those tariffs and the general uncertainty have been substantial. For example, as of May 13, 2019, only 2 LNG vessels have gone from US to China this year, whereas 14 LNG vessels went from US to China between January and end of April in 2018. There are also risks from trade relations with India which, as of a couple of weeks ago, no longer has preferred trading status so there is concern about whether India will retaliate as China has. Turning to renewable projects, most power sector investments are made on company balance sheets, but project finance has grown in importance in recent years, and the tax changes have not yet undermined investment in wind and solar projects in the US. The presentation concluded with an overview of the recent trends in renewable energy offtake arrangements. Click here for the presentation and replay.