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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.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The Oil Services Index (OSX) comprises 15 of the largest oil service companies. The S&P SuperComposite Oil and Gas Exploration & Production Index (S&P Oil and Gas E&P) consists of all oil and gas exploration and production stocks included in the S&P SuperComposite 1500 Index. Investors cannot invest directly in an index. Additional information is available upon request.