June 15, 2023 - On June 14th, the LSTA hosted its “Semi-annual Oil and Gas Update” webinar presented by Reem Abdelrazik, Edward Bontkowski, Bernard F. “Buddy” Clark, Jr., and Jeff Nichols of Haynes and Boone. The semi-annual oil and gas updates have become favorite LSTA member webinars and much anticipated fixtures in the LSTA’s education schedule every year.
The industry has enjoyed a nice period of “boringness” in oil pricing for the past 12 months which has allowed oil producers (particularly the independent producers) to get their finances in order. Oil pricing, which has ranged between $70-$80, has allowed them to paydown exposures on credit facilities, return some capital to investors, and prepare for the next change in markets. The recent International Energy Agency’s (IEA) report states that they were expecting demand to exceed supply by year end by 200,000 barrels per day and thus forecasted that prices would increase for oil. Consequently, the IEA expects a slowing to flat growth production profile in the US. Since April there has been a significant decrease in rig count, indicating a real slowdown. On a positive note, there is still plenty of activity in the Permian basin and so producers focused on this area will likely see activity through the end of the year.
The latest deal trends in the oil and gas industry were then highlighted. SOFR has now become standard across all new deals with existing deals having been amended to transition from LIBOR to SOFR, and the typical spread adjustment of 10 bps is now standard. The reserve based lending (RBL) market has been slow to adopt ESG key performance metrics, but our panelists noted that they are starting slowly to creep into the market and they are watching the space carefully to see how widely adopted they will become in 2024. Because of the economic uncertainty and the ongoing conflict between Russia and the Ukraine, anti-hoarding provisions have survived in many credit agreements. When the economic uncertainty wanes, those provisions may finally disappear.
The panelists also explained the “investment grade period” concept now included in many deals. A borrower, which achieves an unsecured IG rating, enters an IG period and will find that there is a transformative effect on their credit agreement with many of the borrowing base provisions being entirely suspended. During this period, the financial convenants are typically replaced and certain covenant carveouts may take effect during an IG Period relating to indebtedness. restricted payments, and dispositions. If the borrower falls below the IG rating again, then the IG period ends, and the borrower will find that it once again has obligations to execute security documents to secure deals and grant mortgages.
With respect to pricing, the panelists reported that they are currently seeing pricing of 1.75% to 3.75% (fluctuating depending on utilization percentage) and leverage ratios of between 3.0x – 3.75x as the lead ratio from the closing date with incremental stepdowns every quarter.
In Europe, it seems that there is significant bank financing tightening on the horizon for the oil and gas industry. For example, BNP Paribas has announced they are seeking an eighty percent cut to oil exploration financing by 2030 and last month they announced they are stopping new origination entirely; SocGen is aiming to reduce oil and gas exposure by 20% by 2025; and Credit Agricole is ceasing financing of oil extraction projects by 2025.
The results of the Haynes and Boone borrowing base redeterrmination survey were then shared. The simple five questions survey – with the same four questions each time with a fifth new one added – had nearly 100 respondents about evenly split between lenders (43% of respondents) and oil and gas producers (36% of respondents) . The spring survey coincided with a banking crisis, commodity price volatility, and an unexpected decision by several OPEC countries to voluntarily cut oil production. Those factors, on balance, resulted in respondents being pessimistic regarding spring 2023 borrowing bases. The survey shows higher hedging percentages, likely the result of oil and gas producers seeking to lock in recent commodity price increases. After several recent surveys where respondents indicated that producers would increase their use of capital markets (both debt and equity) as sources of capital, respondents seem to have lost faith in their return in spring 2023. Debt capital markets dropped from 9% (fall 2022) to 5% (spring 2023) and equity capital markets dropped from 6% (fall 2022) to 2% (spring 2023).
Interestingly, the capital source that increased the most was family offices, which increased from 7% (fall 2022) to 12% (spring 2023). Producers have been utilizing ABS transactions, in part, due to the lack of a robust RBL market; however, only a small percentage of respondents (12%) report that RBL lenders view these ABS transactions favorably. Click here for the slide and replay.