December 7, 2023 - On December 5th, the LSTA hosted the semi-annual oil and gas webinar presented by the Haynes and Boone team, Jeff Nichols, Kraig Grahmann and Elizabeth Felicidario. By way of background and for those who may not practice regularly in this area, a reserve based loan is a revolving credit facility taken out by upstream oil and gas companies, and the facility is subject to a borrowing base that is set twice per year. A number of factors go into determining the borrowing base, but the two key factors are commodity prices and the actual engineering reserves of the oil and gas company, ie, the calculation of the expected volumes from their production based on present value.
The team reviewed two surveys which are conducted semiannually by Haynes and Boone. First, the Borrowing Base Redetermination Survey, and they noted that they have conducted 18 of these since April 2015. In their most recent survey in October 2023, they had 102 survey respondents including executives at oil and gas producers, financial institutions, private equity firms, and professional services firms. The team explained that the primary objective of the survey is to provide a forward-looking and clear idea of what lenders, borrowers (oil and gas producers) and others are experiencing regarding borrowing base redeterminations in the light of the price uncertainty in the commodity markets. The latest survey was conducted just after a a third quarter run-up in commodity prices which had been driven by strong global demand for oil and natural gas and conflict in the Middle East. Despite these underlying fundamentals, respondents do not expect meaningful borrowing base increases this redetermination season. Hedging percentages continue at the increased levels first seen in the spring, demonstrating that recent market fluctuations have not pushed producers to deviate from their existing hedging strategies. The team also noted that respondents expect a meaningful drop in the use of commercial bank reserved based lending capital as a financing source in the next year, but are increasingly optimistic regarding the utilization of equity and debt from capital markets in 2024 (debt capital markets increased from 5% (spring 2023) to 8% (fall 2023) and equity capital markets increased from 2% (spring 2023) to 6% (fall 2023)). Although the mix of external capital sources has changed over the last several surveys, an internal capital source – cash flow from operations – remains the most popular source of funding. For many years, RBL lenders scrutinized and frowned upon developmental capex spending. However, respondents now expect RBL lenders to be neutral on or even slightly interested in their loan proceeds being used for drilling and completion programs.
Haynes and Boone also highlighted their other survey, the Energy Bank Price Deck Survey which they have done since 2019. Every spring and fall, banks reset the lending limits to oil and gas producers. Haynes and Boone survey energy bankers in the spring and fall and ask them to provide their current oil and gas price decks, which are used to determine oil and gas producers’ borrowing bases. 25 banks sent them their fall version of these oil and gas price decks in October 2023. Most of the participants are regional banks that target smaller loans to independent oil and gas producers. The Fall 2023 price decks for oil are higher relative to the price decks in Spring 2023, with the delta a little over $4 in the short term and decreasing in the later years. There is a smaller difference in the price decks for natural gas, with gas prices in the Fall 2023 survey slightly lower than in the Spring 2023 survey. The slight decline in natural gas prices relative to the Spring 2023 price deck survey reflects the slide in natural gas prices throughout 2023 as mild temperatures throughout the U.S. resulted in reduced demand for natural gas that was not offset by rising demand for LNG to Asia and Europe. The increase in oil prices in the Fall 2023 oil price decks is consistent with the sharp rise in oil prices in mid-2023. Higher short-term oil prices can be linked to cuts made by OPEC, but there continues to be concerns over potential waning demand.
Click here for the slides and replay.