Haynes and Boone Conducts Fall Survey of Borrowing Base Redeterminations



As a result of slumping oil prices, key players in oil and gas financing are predicting a decrease in the ability to borrow against reserves by an average of 39 percent, according to a Haynes and Boone, LLP survey conducted prior to the fall borrowing base redetermination season.

In contrast, a similar survey conducted during the spring found that the same borrowers and lenders believed there would be an average of a 25 percent decrease in borrowing bases. The percentage of borrowers predicting a base decrease has grown from 68 percent in the spring to 79 percent in the fall, according to the survey.

The fall survey was compiled from 182 responses received from a wide range of oil and gas professionals in September. About 40 percent are executives at oil and gas companies, including upstream, midstream, and oilfield services, 40 percent are financiers from commercial and investment banks and private equity firms, and 20 percent are professional services companies and others.

“What really stood out to us was the contrast between the results of the spring and fall survey,” said Houston Partner Jeff Nichols. “In the spring, it looked like the response was a ‘wait and see’ mentality. But with fall approaching, the ‘wait and see’ mentality seems to have passed and there is recognition that more action is needs to be taken to reduce debt through equity investment, restructuring or even declaring bankruptcy.”

Nichols said most producers have already begun to reduce discretionary capital expenses and negotiate with their oilfield service providers. Until prices rebound, producers will need to live within cash flow, he said.

“If that means farming out or selling undeveloped acreage that’s better than letting it expire for lack of operations,” Nichols said. “Begin considering alternative means of revenue and cash flow outside of your producing reserves.  Producers can look to other assets that they may own that do not contribute to their borrowing base such as drilling and production equipment, midstream assets, and undeveloped reserves.”

Assets can be monetized through a variety of transactions such as a sale and leaseback or farmout agreement, he said.

Buddy Clark, chair of the Haynes and Boone energy practice, noted that in survey last spring 19 percent of respondents were expecting to skip the spring borrowing base redetermination. “In our experience that was an optimistic expectation,” Clark said. “Last spring we saw very few banks electing to skip the borrowing base redeterminations. Many lenders, instead of skipping the borrowing base redetermination, where they could justify it, were able to reaffirm the borrowing base values for their customers. In comparison to what happened in the spring, responses this fall show that folks in the industry expect lenders more producers to see decreasing borrowing base amounts than last spring.”

Clark said the most important issue is how to get through this price decline without negating everything that has been built up in the last decade in the oil and gas industry.

“Understanding that the ups and downs in oil and gas prices are cyclical, the industry needs to react knowing that this period will pass,” Clark said. “We don’t know how long it will take, but we do know that at some point, prices will rise and the industry will bounce back. When regulators are pressuring banks to clean up their energy portfolios, they should be taking this into consideration. If financiers have confidence in the rise in oil and gas prices, they should be looking for opportunity to provide financing to producers for bottom dollar now with confidence that they will come out on top.”

As a follow-up to the borrowing base survey, firm Bankruptcy and Energy lawyers released and then updated their inaugural Oil Patch Bankruptcy Monitor which details a rising tide of 2015 exploration and production company Chapter 11 filings totaling about $13 billion in cumulative secured and unsecured debt.

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