Page 5 - NorthAmOil Week 43

NorthAmOil COMMENTARY NorthAmOil
equity capital markets as a source of capital for producers had gone from “small” in the spring 2019 survey to “miniscule” in the autumn 2019 survey. This has led to alternative capital provid- ers filling the void with debt financing. Haynes and Boone said the percentage of respondents considering debt from alternative capital provid- ers to be a primary source of capital had doubled since the spring 2019 survey.
The survey’s respondents do not expect pub- lic equity markets – which were a primary source of capital for upstream players before 2018 – to reopen until 2021 or later.
Others are reporting similar findings. The Wall Street Journal reported on October 20 that as they look for new sources of cash, some shale drillers are turning to a type of asset-backed security that involves existing oil and gas wells. Producers transfer ownership interests in these wells to special entities that then issue bonds to be paid off by the output from the wells over time.
The first such offering was closed by Raisa Energy in September, with sources familiar with the matter telling the Wall Street Journal that several more were planned before the end of this year. According to the sources, the bonds will pay nearly 6% interest on the best quality wells, with higher rates paid on riskier assets. The risk with such securities, however, is that the industry con- tinues to find it difficult to project output from shale wells accurately over the long term. Indeed, the Wall Street Journal was among those previ- ously reporting that thousands of shale wells drilled over the past five years were producing
less than forecast by their owners. This can partly be attributed to oil and gas price trends, but it nonetheless illustrates the challenges of betting on future shale output.
Despite this, Raisa’s CEO, Luis Rodriguez, said the wells involved in the company’s offering were old enough for production to be modelled relatively accurately. He declined to provide details about the offering, including how much it had raised, though.
A number of indicators will emerge over the coming weeks to illustrate the shale industry’s shorter-term trajectory, including third-quarter results from producers. Added to this will be fur- ther details of borrowing base redeterminations.
Eight of Reuters’ sources indicated that larger banks had set the value they will ascribe to hydrocarbons behind RBLs to $46-51 per barrel of oil over the next five years. Meanwhile, a Dallas Federal Reserve Bank energy survey published in late September also found that banks were cutting their leverage limits. Some of the survey’s participants noted that banks had lowered the maximum debt level permissible to 2.5-3.0 times earnings before interest, taxes, depreciation and amortisation (Ebitda), from 3.5-4.0 times previously.
All of these factors are likely to force US production growth to slow, but in a cause for further concern among shale producers, this is unlikely to boost crude prices as a slowing global economy leads to increasingly bearish demand expectations. The shale industry’s challenges are therefore far from over, and potentially stand to worsen.™
A number of indicators will emerge over the coming weeks to illustrate the shale industry’s shorter-term trajectory.
Week 43 29•October•2019 w w w . N E W S B A S E . c o m
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