Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: Fall Borrowing Base Declines Will Be Manageable but Expect More Cuts in 2017
October 12, 2015
Starting this month and likely through the end of November, E&P companies are going to go through their semi-annual borrowing base redeterminations. This is the process where commercial banks determine how much money they are comfortable loaning to E&P companies. Perhaps unlike any redetermination process since the 2008/2009 financial crisis, this fall's redetermination process is fraught with uncertainty as the vast majority of our small/mid E&P companies under coverage are largely cut off from equity and high yield capital markets and, therefore, looking at their senior debt facilities as their primary source of capital/liquidity. Depending on the outcome of this process, we could see the fall redetermination potentially 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, detail new concerns as government agencies have now entered the picture, review our expectations for the process, and summarize those E&P companies most at risk of falling lending levels.
Bottom line: After realizing only an ~11% average reduction, as shown in the table that follows, for our small and mid-cap E&P coverage universe, last spring, we think fall borrowing base redeterminations will likely be more punitive this fall, leading to a 15-20% reduction in overall U.S. E&P bank credit facilities. There are numerous reasons that, in our view, this fall's borrowing base season will lead to deeper cuts than the spring: (1) hedge books continue to deteriorate; (2) PUD values are likely to fall given slowdown in drilling pace; (3) government agencies are getting involved; and (4) the lower oil price deck commercial banks are using this time around. Taking all of this into account, we would expect borrowing bases to be down, on average, closer to 20-25%.