Oil & Gas Monitor Guest Article: New Paradigm in E&P Finance

03/10/2014


Domestic exploration, production and development have been transformed by technological advances leading to an explosion of unconventional and conventional production of oil, natural gas and natural gas liquids. The first stage of this recent transformation was the land grab and lease maintenance drilling in the early part of the decade. Now, the second stage has begun, which is the rationalization of acreage portfolios and more deliberate exploitation of reserves. Ultimately this stage will require billions of dollars of capital expenditures to fully develop the possible and probable reserves unlocked by this new technology. Oil and gas companies will spend about $723-billion on exploration and production in 2014, an increase of 6.1 percent over 2013, Barclays Bank said in a recent report. Where will the money come from?

The old paradigm for the last 40 years has been that a producer borrowed from his bank against a percentage of the PV10 value of his PDP reserves (the “borrowing base”) and used the proceeds under a revolving-based loan to further develop existing acreage. Under this “conforming” borrowing base loan structure, lenders were generally able to keep pace with the capital needs of the producer’s drill bit. In large part this was because, prior to recent technological advances, wells were simpler – single vertical wells, no multistage fracs. Accordingly, drilling costs were (relatively) cheaper than today. The borrowing base revolver structure worked well to serve the producer’s capital needs where every six months the lender would reevaluate the producer’s reserves (including new production) and increase the borrowing base to fund further development drilling and the occasional producing property acquisition.

Excerpted from the Oil & Gas Monitor, March 10, 2014. To view full article, click here.

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