Page 4 - NorthAmOil Week 43

NorthAmOil COMMENTARY NorthAmOil
Shale drillers’ access to capital shrinking further
Shale drillers could encounter new challenges as borrowing base redeterminations by banks are expected to shrink the amount of capital available to them further still
US
WHAT:
Banks are anticipated
to reduce the amount they are willing to lend to shale drillers.
WHY:
Expectations that oil and gas prices will remain lower for longer are leading to lower reserve valuations.
WHAT NEXT:
Further reductions in capital availability could spur bankruptcies and consolidation among smaller players.
THE embattled shale industry is facing addi- tional headwinds as banks review their lending to energy companies. Such reviews of produc- ers’ borrowing bases take place twice a year, and there are expectations the latest round could lead to a reduction in the amount shale drillers can access. This comes amid mounting bearish- ness on oil and gas price trends, with prices now anticipated to be lower than previously forecast in the short – and potentially medium – term. Meanwhile, years of comparatively low returns from the shale industry continue to weigh on producers’ ability to secure new capital.
Citing a number of sources familiar with the matter, Reuters reported on October 28 that major banks including JPMorgan Chase, Wells Fargo and Royal Bank of Canada (RBC) had already cut their estimated values for oil and gas firms’ reserves. These estimates, based on price expectations, serve as the basis for those compa- nies to receive reserve-based loans (RBLs). The changes are due to kick in from this month, hit- ting producers’ ability to borrow.
According to Reuters, natural gas price pro- jections have been cut by around $0.50 per mil- lion British thermal units ($13.83 per 1,000 cubic metres), about 20% below levels set in the spring. As a result, industry sources anticipate that some firms could face a 15-30% reduction in the size of their loans. Oil prices, meanwhile, are now forecast to be about $1-2 lower than previous projections made by banks in the spring.
Taking a hit
The cuts to borrowing bases are expected to affect smaller drillers particularly badly. And this comes as bankruptcies in the oil and gas industry are already on the rise as capital dries up. According to law firm Haynes and Boone, there had been 33 North American bankruptcy filings among oil producers in the year up to the end of September. Of these, 27 filings have come since May – compared with 28 filings for the whole of 2018.
The most recent prominent bankruptcy was filed earlier this month by EP Energy, which cited
“challenging dynamics as a result of depressed commodity prices”. The company had $4.6bn worth of debt at the time of filing.
Companies aiming to avoid filing for bank- ruptcy protection may be compelled to consoli- date with other producers instead. Mergers and acquisitions (M&As) have been fairly lacklustre this year, apart from a handful of prominent multi-billion dollar deals, led by Occidental Petroleum’s takeover of Anadarko Petroleum. However, this could change as capital dries up further and producers run out of options.
A Tudor, Pickering, Holt & Co. (TPH) man- aging director for upstream research, Matt Portillo, told the Financial Times last week that public investors believe the shale industry has 5-10 too many companies. According to him, such investors want to see a consolidated indus- try with greater scale, less debt and better control of capital spending.
As a result, more deals could be seen among smaller producers, with buyers making offers based on modest premiums and paying in stock. One such deal was announced recently, when Parsley Energy said in mid-October it had agreed to take over Jagged Peak Energy in an all-stock transaction valued at around $2.27bn, including debt. Parsley described the transaction as a “modest premium” acquisition. The offer represented $7.59 per Jagged Peak share based on Parsley’s closing price on October 11, and a premium of 1.5% compared to Jagged Peak’s 30-day volume weighted average price and 11.2% compared to its closing price on October 11.
Other smaller and medium-sized players may now be encouraged to follow suit as banks reduce producers’ borrowing bases.
What next?
In late September, Haynes and Boone published the findings of its latest survey of borrowing base redetermination expectations. The law firm noted that the majority of respondents anticipated borrowing base decreases for the first time since 2016. It added that the use of debt and
Companies aiming to avoid filing for bankruptcy protection may be compelled to consolidate with other producers instead.
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w w w . N E W S B A S E . c o m Week 43
29•October•2019