U.S. Oil Producers Self-Fund Capital Needs as Prices, Reserves Rise

April 10, 2018

HOUSTON (Reuters) – U.S. oil and gas producers plan to self-finance some of their production even as higher crude prices boost their ability to borrow against reserves, according to a survey of energy companies and financiers on Tuesday.

The survey found 21 percent of producers saying they expect to tap cash flow from operations for capital needs this year, a higher percentage than those who selected debt from banks and equity from private equity firms, at 20 percent and 19 percent, respectively. This was the first year that respondents were asked about self-funding.

“The public companies are having to live by cash flow because that’s what the market is dictating,” said Buddy Clark, a partner at law firm Haynes and Boone, which conducted the survey of 365 producers, oilfield services companies, lenders and advisers.

Still, closely held producers can expect lenders during their semi-annual valuations of oil and gas reserves to offer more capital this spring, according to the survey. More borrowing power, from crude prices CLc1 up 23 percent in the last year, can finance greater drilling.

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The survey found that more than 80 percent of respondents expect their borrowing base to increase, with most expecting it to rise between 10 percent and 20 percent. A year ago, less than 70 percent of respondents expected their borrowing base to increase 10 percent or more.

“It is a more optimistic survey than the prior year,” said Clark, citing the improved picture for commodity pricing and access to private financing. Clark said more capital is available, primarily from private equity firms and funds. At the same time initial public offerings by producers have declined, saying IPO work at the firm has been below the pace of 2016.

Borrowers also are locking in more of their future production using hedges that insure against price declines. Respondents have locked in between 50 percent and 60 percent of their 2018 production, the survey said.

Reporting by Gary McWilliams; Editing by Cynthia Osterman