Redeterminations Can’t Come Fast Enough: Energy Bankers
As we sit here today WTI is trading around $34 per barrel and natural gas at $1.68 per Mcf. Reserve base lending agreements are scheduled to be redetermined in the coming months. Since the fall redeterminations, oil prices have fallen about 24% and gas prices have declined about 33%. From the bankers we talk to, these redeterminations can’t come fast enough.
Jeff Nichols, head of the Haynes and Boone Energy Finance Group spoke to Oil & Gas 360® in September 2015 ahead of the fall redeterminations about what they were seeing from the firm’s borrowing base expectations survey results. “What really stood out to us was the contrast between the results of the spring and fall survey. In the spring, it looked like the response was a ‘wait and see’ mentality. But with fall approaching, the ‘wait and see’ mentality seems to have passed and there is a recognition that more action is likely to be taken by companies, or needs to be taken, to reduce debt through equity investment, restructuring or even declaring bankruptcy.”
Running out of road
Drilling in the Wattenberg Photo: Oil & Gas 360
Though the industry has seen an uptick in bankruptcy filings, banks largely kicked the can down the road again during the fall 2015 review.
As a banker told us, “We kicked the can down the road, and we’re running out of road.” With the near-term crude oil price solidly in a $30 oil environment, and it is generally accepted that “lower prices for longer” is a reality, banks are having to make a move. Monthly future prices for crude oil as of March 2, 2016 don’t break $40 per barrel until August of 2016 or $50 per barrel average until sometime after 2020.
We have heard from a number of sources that banks are proactively moving loans for companies that have 4.0x Total Debt-to-EBITDA metrics into their workout groups, and they say these workout groups are starting to be overwhelmed. “I’m losing customers in my own company,” said a banker who asked to not be named. “My customers are moving from my group to my banks’ workout group because of the new financial rules from the regulators.” Oil & Gas 360® published some data points on E&P company debt levels from EnerCom’s Database in a story titled: Energy Industry: I’d Rather Not Be in Your Debt Forever.
The bankers’ headache: drawing down the revolver ahead of redeterminations
One of the biggest headaches for bankers this month has been sourced to the companies that are being advised to draw down any available revolver line ahead of the redeterminations.
- On February 26, 2016, W&T Offshore, Inc. (Ticker: WTI) announced that it has borrowed approximately $340 million under the Company’s Bank Credit Facility, to be used for general corporate purposes. Including these funds, the Company’s current cash position totals approximately $447 million.
- On February 18, 2016, Ultra Petroleum (ticker: UPL) announced that they recently borrowed $266.0 million under the Credit Agreement, which represented substantially all of the remaining undrawn amounts under the Credit Agreement. As a result, no material further extensions of credit are available under the Credit Agreement. These funds are intended to be used for general corporate purposes.
- On February 4, 2016, LINN Energy, LLC (Ticker: LINE) announced that the Company recently borrowed approximately $919 million from LINN’s credit facility, which represented the remaining undrawn amount that was available under the Credit Facility. These funds are intended to be used for general corporate purposes. Total borrowings under the Credit Facility are now $3.6 billion. Berry Petroleum Company LLC’s credit facility remains fully utilized at $900 million, including $250 million of restricted cash posted as collateral.
These are only a few of the companies that have done this in recent months but it is interesting to note that Kirkland & Ellis LLP is listed as legal advisor for each of these companies. To our knowledge, Chesapeake Energy Corporation (ticker: CHK) has not drown down completely, but the company did issue a press release in February that it is being advised by Kirkland & Ellis LLP.
For banks that are trying to reduce their exposure to the energy space, the three drawdowns listed above represent more than $1.5 billion in capital entering the market. It takes a lot of cash to restructure a company and if companies are feeling that this might be a reality, they are looking to make sure they have some liquidity going into the process.
Banks marketing risky debt to hedge funds
Banks are under pressure to get creative on how to manage their debt commitments and their cash reserves for paper that the regulators believe are substandard. Bankers are using the Over the Counter market to “market” debt tranches. Recently, a $75 million tranche of reserve backed debt for California Resources Corporation (Ticker: CRC) was bought for a price somewhere between $68 and $70 per $100.
In the case of the CRC paper, we understand that this was purchased by hedge fund investors. We know that the hedge funds are being active in this space but also know that reserve base lending assets can be a difficult asset to own. Though you are high on the priority list in the event of a liquidation, reserve base lending agreements have technical reviews and redeterminations that can be hard for some hedge funds to deal with.
If you talk to the energy desk at your local bank they will say they are buyers right now, but the CFO’s of those banks, are saying something very different. There is a global effort to reduce exposure to risky assets (not just oil and gas). This is partly driven by uncertainty around potential changes in OCC bank regulations. On the energy front, equity analysts keep hammering big banks on their energy exposure and the management teams are getting tired of having to answer the question.
EnerCom recently learned that bankers at Whitney Bank in New Orleans are being directed to cut its exposure to energy by 50% and are laying off staff. Changes in personnel were recently made at Paribas in Houston. Are the regional banks in the market to be lenders of choice for the long haul? We believe yes. However, rules coming from regulators in an unprecedented period of time for the industry certainly puts a “pall on the haul.”
What does the future hold?
The future for companies on the reserve base lending side will be divided into the “have debt room” and “have no more debt room.” The “have debt room” (tickers: RSP, FANG, COG, CXO…) will be banked and the “have no more debt room” will seek other capital sources to work through the next 18-month commodity curve. The other sources will include joint ventures, asset sales, private equity, hedge funds and family offices. Even with the efficiencies that have come along with this downturn, the oil and gas space remains a capital intensive industry and access to capital is core to a company’s success.
