December 8, 2021 - by Bridget Marsh. On December 7th, the LSTA hosted the Semi-Annual Oil & Gas Industry Update webinar presented by Kraig Grahmann, Jeff Nichols, Kelli Norfleet, and Gilbert Porter of Haynes Boone. Haynes Boone has conducted 14 borrowing base redeterminations surveys since launching the product in the spring of 2015, and those surveys have gained international recognition, even, for example, being cited by OPEC. The borrowing base is the amount of credit a lender is willing to extend to an oil and gas producer, and after difficult borrowing base redetermination seasons in 2020, the survey showed that producers should expect the fall 2021 redetermination season to result in materially improved RBL credit availability. Lenders were generally more bullish on borrowing bases increasing than producers, and most respondents expected borrowing bases to increase 10-20%. The recent increases in hedging levels, however, are a source of concern. Although many producers saw these locked-in hedges as a lifesaver in the 2020 markets, in today’s market they see them as an impediment to cashing in on the price spike days this year. Although the trend of higher hedging levels has continued into the fall of 2021, recent spikes in oil and gas prices mean that these hedges are indeed more of a burden than a benefit for many producer.
As part of their biannual Energy Bank Price Deck Survey series, Haynes Boone recently asked leading energy banks to provide their fall oil and gas price decks (these are used by banks to determine oil and gas producers’ borrowing bases under their 2021 reserve-based loans). The borrowing base is based on a number of factors, and each energy lender has its own proprietary algorithm on how to determine its borrowing base. Future expectations of commodity prices over the life of the loan are not the sole determiner, but they are a principal variable in a bank’s calculations, and therefore, predictions on future borrowing base redeterminations are heavily influenced by future commodity price expectations. WTI prices have been above the $70/bbl mark since September, a marked improvement from the sub-$20/bbl prices seen in the spring of 2020, and bankers’ price expectations paint a much improved outlook for oil prices.
The pace of oil & gas producer bankruptcy filings has slowed considerably this year. Commencing in 2015, following the sharp decline in energy commodity prices, creditors of E&P companies started an attack on the balance sheet of highly leveraged oil companies, which led to many oil companies filing for bankruptcy. Many of those companies exited Chapter 11 after addressing their balance sheet through a debt for equity exchange. In 2020 the strategy shifted, and, while the attacks on highly leveraged energy companies continued, creditors began also to target debtors’ income statements. By compelling oil and gas debtors to reject burdensome transportation agreements, creditors are no longer satisfied with deleveraging the balance sheet—they also seek a better income statement. Notably, contracts including covenants running with the land (“CRWL”) which affect the counterparty’s real property interests cannot be rejected in bankruptcy. Although determining if a contract has a CRWL is a fact specific analysis and heavily dependent on state law, generally, there must be (1) intent, (2) privity, and (3) it must touch and concern the land. Although initial bankruptcy cases found midstream agreements contained CRWLs and could not be rejected (members may recall the cases of Sabine, Badlands, and Alta Mesa as examples of that trend), in more recent cases, courts have held that agreements did not contain CRWLs, but even if they did, the agreements could still be rejected. Thus, rejection of midstream agreements may become more common in future oil and gas bankruptcy cases; however, uncertainty remains regarding the practical effect of rejecting a midstream contract that contains a CRWL. Midstream providers making significant capital outlays to fund development of new infrastructure may look for new ways to secure recovery of amounts expended. Click here for the replay and here for the slides.