According to the most recent borrowing base redeterminations survey from Haynes and Boone, a majority of oil and gas producers, oilfield services companies, financial institutions, private equity firms and other industry participants expect borrowing bases to decrease by at least 20% in response to the recent freefall in commodity prices. In addition, 45% of respondents expect even deeper cuts of 30% or more. In contrast, the largest share of respondents (40%) in the fall 2019 survey edition of the survey said they expected borrowing bases to decrease by only 10% during that redetermination season.
Kraig Grahmann, head of Haynes and Boone’s Energy Finance Practice Group, said the firm initially sent out survey questions in mid-February but then reached out again to industry professionals in early March to ask them if they wanted to revise their predictions in light of the OPEC price war and growing concerns about the coronavirus. According to Grahmann, the latter responses were far more pessimistic.
“The rapid deterioration in market conditions that started on March 8, 2020 had an immediate and deep impact on predictions about future borrowing capacity,” Grahmann said.
Other key findings in the survey include:
- Producers are entering this downturn relatively well-hedged, raising a question about whether producers will keep these hedges in place to preserve cash flow or immediately monetize them to enhance liquidity.
- Producers are expected to use cash flow from operations as their primary sources of capital in 2020, followed by debt from alternative capital providers as the next likeliest source of capital.
“When compared to the fall 2019 responses, survey participants who see private equity as a source of E&P capital have dropped by nearly 50%,” Grahmann said. “The difference is being made up for with debt from alternative capital providers.”
Haynes and Boone also released its 2020 price deck survey, which surveyed energy banks about reserve-based lenders’ oil and gas price decks. As with its borrowing base redeterminations survey, the firm initially sent requests out to participating banks in mid-February and reached out again in March after the announcement of price cuts by Saudi Arabia.
Key takeaways from the survey include:
- The average base case for oil post-crash is 15.6% lower than the fall 2019 base case.
- The average base case for gas post-crash is 12.3% lower than the fall 2019 base case.
“The significant drop in bank price decks from last fall signal a significant drop in collateral value for oil-weighted producers,” Buddy Clark, co-chair of the Haynes and Boone’s energy practice group, said. “However, the continued uncertainty in global oil markets may give banks and borrowers an excuse to skip or postpone the spring borrowing Base season. Gas prices have been low for so long, gas is starting to look like a more bankable commodity in comparison to oil, which is now subject to more volatility to the down-side. Perhaps this will be a case of ‘low and steady, wins the race.’”
Haynes and Boone is an international corporate law firm providing legal services in energy, technology, financial services and private equity.