Banks rush to curb funding for oil companies

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NEW YORK, April 24 (LPC) – The semi-annual assessment of reserve-based loans of energy borrowers has gained more importance than ever as banks seek to reduce their exposure to oil and gas companies amid the global Covid-19 pandemic which brought down demand for oil and a price war between Russia and Saudi Arabia which flooded the crude market.

Lenders are grappling with how best to reduce the borrowing bases of energy companies while ensuring that they still have some access to capital. Some estimates indicate that borrowing bases could be cut by 30% or more in the first half of 2020.

“In a recovery, banks want 100% of the money they lend,” said John Kempf, senior director of Fitch Ratings. “This round, they will probably be a little harder on the companies (exploration and production of oil) in determining their borrowing bases.”

Oil and gas companies are feeling the pressure from the historic turmoil in the oil markets.

“There has been a huge drop in demand – no one drives a car, no one goes to work, no one takes a plane. We have to reduce supply to synchronize with demand, ”Kempf said. “We’re starting to see production going down, not as fast as it should be, but we’re starting to see it going down.”

Fitch expects the energy loan default rate to rise to 18% by the end of the year.

The average supply of US oil and gas loans tracked by Refinitiv LPC fell to 71.95 cents on the dollar on March 24, nearly 25% lower since the start of the year. It had rebounded to 75.15 cents on Wednesday. This trajectory has followed the wider market – the LPC 100, a cohort of the 100 most liquid loans in the United States, has fallen more than 21% this year to an almost 11-year low at 77.87 cents. on March 23 before rebounding.

TIGHTEN THE BORROWING BASES

Twice a year, banks re-determine oil and gas companies’ RBL borrowing bases, reworking the amount of debt borrowers can draw on. Adjustments take into account oil and gas prices and forecasts, as well as current and projected production.

Centennial Resource Development said Thursday that its agent bank had recommended that the oil producer’s borrowing base be reduced by nearly 42%.

Earthstone Energy, which develops oil and gas properties, said its borrowing base was reduced by 15% from $ 325 million to $ 275 million. It had $ 152 million outstanding as of March 31.

“We went there a little earlier in the cycle and we did it because we saw signs of volatility,” said Mark Lumpkin, chief financial officer of Earthstone. “I think going earlier was absolutely to our advantage.”

Oil and natural gas producer Chaparral Energy said it had a borrowing base of US $ 325 million with an outstanding amount of US $ 160 million as of March 31. On April 2, he informed his lenders that he wanted to borrow US $ 90 million to increase his cash flow. Later that day, Chaparral’s lenders re-determined the borrowing base again, reducing it to US $ 175 million, creating a “borrowing base deficit” of US $ 75 million.

Deficiencies often need to be corrected within six months.

Banks are also taking advantage of this period of redefinition to tighten restrictive covenants in credit contracts, increase the interest rate they charge and include so-called “anti-cash hoarding” provisions, which prevent companies from withdrawing the full amount. of their guns and keep them in cash.

“Banks are very focused on reintroducing anti-cash language into credit facilities,” said Kraig Grahmann, head of the energy finance practice at the Haynes and Boone law firm.

Exploration and production company Ultra Petroleum Corp said that in addition to reducing its borrowing base, its anti-cash amount was also reduced to $ 15 million, from $ 25 million for all time there are any outstanding loans under the revolving credit agreement.

THIN LINE

But banks have to walk the fine line because if they are looking to reduce their risk, they do not want to push companies into bankruptcy and hurt collections if there is a chance that the health of borrowers will improve.

“Banks are going to take any type of default seriously,” Grahmann said. “Their goal is really to get the result that maximizes collection rather than seeking total borrower control. “

Declining demand for oil from the coronavirus and stressed oil prices will continue to affect what can be done in the RBL market, Earthstone’s Lumpkin said.

“Undoubtedly creates a lot of stress for banks on their loan portfolios and the bar for obtaining internal approval of any type of borrowing base is exceptionally high and in some banks this is just a no- beginner, ”he said. (Reporting by Kristen Haunss. Editing by Matthew Davies and Chris Mangham)

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