Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: How Will Borrowing Base Redeterminations Impact U.S. E&P Companies?
February 23, 2015
While oil prices seem to have bottomed (at least for the time being) and energy stocks have rallied over the past month, the potential pain for U.S. E&P companies is far from over. In the next few months (March/April), commercial banks will put their U.S. E&P customers through something called "spring borrowing base redeterminations." These redeterminations could substantially reduce debt limits and kick off a wave of mergers, property deals, and even some corporate restructuring. In this week's Energy Stat, we dig into the mechanics of E&P companies' borrowing bases and detail the potential magnitude, consequences, and those at most risk of falling lending levels. This is important because we think spring borrowing base redeterminations could lead to a 15-20% reduction in overall U.S. E&P bank credit facilities. If we just focus on the effect that the lower oil and gas price deck will have on borrowing bases, then we would expect borrowing bases would get cut by closer to 30%. However, the positive effects of production growth in the second half of 2014 and restructured hedge books will offset some of the pain of the lower price decks. These positive factors will largely be muted in another six months for the fall borrowing base redeterminations where we expect to see even more pronounced declines.
This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.
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