December 4, 2020 - On December 3rd, the LSTA hosted the Haynes and Boone team of experts, Jeff Nichols, Kraig Grahmann, Brent Shultz, and Kelli Norfleet, who presented the ”Semi-Annual Oil & Gas Energy Update”. The most recent Haynes and Boone Borrowing Base Redeterminations Survey, a progressive survey that reveals what lenders, borrowers and others in the industry expect regarding the borrowing base redeterminations in light of oil price volatility, was highlighted. Of the 142 survey respondents, about half are borrowers and a third are lenders. When asked what percentage do they expect borrowing bases to change in fall 2020 when compared to spring 2020, respondents believed that there will be a 10% to 20% decrease, but this is not as deep as the 20% to 30% decreases respondents expected in the spring. Nonetheless, they will still be very impactful to most producers, many of whom have limited availability under their borrowing bases and are not in a position to absorb even a minimal decrease. When asked, on average, what percentage of anticipated future production have reserve-based credit facility borrowers hedged for the next 12 months, the survey shows a substantial increase in hedging percentages, which is likely the result of bankers pushing their borrowers to increase hedge volumes over the last several months. Thus, although producers now seem to be well-hedged, most of this increased hedging was likely locked in during recent months when the market was not providing attractive prices for producers.
In 2021, producers are planning to source capital from a variety of sources, but interestingly capital raising is increasingly coming from producers’ self-generated sources: cash flow from operations and monetization transactions. 25% expect to source capital from cashflow from operations which represents a major shift from 2011-2014. Bank debt stood at 17%, representing a material source, and notably, private equity has shrunk significantly standing at only 9%. Though there are third parties interested in making new investments in the E&P space, they consist of a limited number of higher-cost sources of capital looking to provide new money to a small pool of better-positioned producers.
Despite the current stress on the reserve-based loan structure, a substantial percentage of respondents expect it to survive in some form but with modified terms, including increased pricing, cash flow sweeps and tighter financial covenants, and to provide less capital at least for the next few years.
Vulture funds have not shown a willingness to pay amounts that would entice banks to cut their losses now, but the team cautioned that if banks did move now to cut their losses, their losses would be severe. Looking ahead, in 2022-2024 there is a looming maturity wall and if there is not a significant recovery, it will be difficult to work out what to do with that debt that is maturing. Click here for the slides and click here for the replay.