No question, oil above $60 a barrel is a big help to North American energy companies. But even with prices up about 20 percent from a year ago, not everyone will get big boosts in their credit lines during the appraisal season that’s now kicking into high gear.
Analysts expect oil and gas companies in the Permian Basin will receive the biggest increases in what they can borrow against the value of their oil reserves, mainly in Texas and New Mexico. But outside the region, particularly in Canada where producers get a lower price for heavy oil and natural gas, borrowing bases are expected to remain mostly flat or grow incrementally.
Energy companies meet with lenders semi-annually to have their reserves valued as collateral based on future expected commodity prices. Permian Basin companies could have their borrowing bases increase 20 percent to 40 percent, fueled by projections of production growth of 40 percent for 2018, according to James Spicer, who follows the industry for Wells Fargo & Co.
“The Permian Basin is the most prolific basin in the U.S. right now,” Spicer, a senior high-yield analyst, said by phone from Charlotte, North Carolina. “Banks are certainly willing to lend and you’re going to see that reflected in borrowing-base increases.”
That’s a marked change from past years, when tumbling oil prices led to widespread borrowing-base reductions and credit line cuts as banks reduced their exposure to oil and gas. About 70 percent of high-yield energy companies tracked by Bloomberg Intelligence saw their borrowing base cut between autumns of 2015 and 2016, the worst period of the slump. Some of the cuts were so severe that they tipped the producers into bankruptcy.
Among those in the BI group that survived, Bellatrix Exploration Ltd. saw the biggest cut at 73 percent, but the borrowing base has been steady since then despite weakness in natural gas prices. Chesapeake Energy Corp., which operates in Texas’ Eagle Ford formation, also kept its credit line largely intact after completing a series of deals that cut overall debt and pushed out maturities; it was rewarded with a higher rating from Moody’s Investors Service in December as oil production grew. Representatives for the two companies didn’t immediately respond to requests for comment.
Companies that have already reported increases include Abraxas Petroleum Corp., and Jagged Peak Energy Inc., which have Permian properties, and WildHorse Resource Development Corp. in Texas’s Eagle Ford region. Moody’s raised its rating for WildHorse to B2 from B3 on Friday, and said more upgrades might come if the company moderates its use of debt financing to further its growth.
Production growth has exploded in the Permian Basin as companies scramble to get a piece of the formation where they’re able to drill more cost-effectively than other U.S. regions, Spicer said. The average operating cost for the cheapest part of the Permian is $25 a barrel, compared with $38 for the Bakken formation in North Dakota and $40 for other U.S. non-shale formations, according a report from the Federal Reserve Bank of Dallas.
Production growth in the Bakken, and the Montney and Duvernay regions in Canada has seen a more mixed recovery, driven by lower prices for natural gas and heavy oil, and pipelines that are full.
“The Bakken will probably take the most pain,” Thomas Watters, an S&P Global Ratings analyst, said by phone from New York. “The price that they were getting for Bakken oil was lower than what they were getting for West Texas Intermediate, and that’s basically due to transportation issues.”
Paresh Chari, a Moody’s analyst, expects bankers to keep borrowing bases largely unchanged for Alberta producers. “It’s sort of a lesson learned through the downturn,” Chari said by phone from Toronto. “They still are aware that commodity prices are not at the absolute top.”
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Shareholders have pressured companies to live within their cash flow and pay out dividends, Watters said, and capital spending growth has been reined in, especially outside the Permian region, according to a March 15 Wells Fargo note. Half the exploration and production companies that the bank follows haven’t tapped their credit facilities at all.
The outlook is fairly benign for most producers, Chari said, even for those that aren’t boosting output, with debt-cutting and refinancings during the past two years allowing them to tread water until prices improve. Junk-rated energy companies were able to fund a record $9.25 billion of issuance in January, according to data compiled by Bloomberg.
That option may be harder to get as recent equity market weakness has crept into junk-rated debt, with McDermott International Inc., an energy engineering-and-construction company, compelled to sweeten terms to sell its leveraged loans and high-yield bonds. Higher interest rates and looming trade wars are keeping some investors on the sidelines, Wells Fargo’s Spicer said.
“We think the bank market can pick up some of the slack,” he said in a March 23 note.