Oil, Gas Bankers May Have More Bite in 2016

by Deon Daugherty, Senior Editor

Interest in reserve based lending (RBL) and base borrowing redeterminations (BBR) probably got more ink – at least in the energy press – in 2016 than anyone’s seen since shale first rocked the world.

Neither was a new concept to bankers or the oil and gas companies that use them to capitalize on funding expensive projects and technology. But RBL and BBR took on heightened urgency this year.

It was the downturn’s fault. In November 2014, commodity prices began a precipitous fall. In the following months, rapidly declining oil prices and asset devaluation spooked many companies destined to convene with bankers – and for the first time, regulators – for scrutiny of their biannual credit-to-debt ratios.

This spring, energy companies and their lawyers were nervous when bankers opened the books to look at what exactly was going on. Turned out, by and large, it wasn’t as bad as most expected. Credit was generally cut between 5 and 10 percent.

The threat was put off another six months. But during that time, oil prices and asset values continued their descent. As the October evaluation drew near, again, it seemed time to fear the reaper. Credit cuts expected in the ballpark of 30 percent or more again sent the industry into something of a tizzy. Those companies dependent on the generosity and faith of banks – especially small independents and service companies – renewed their worrying.

Turned out, again the average cuts were between 5 and 10 percent. And while that’s an average, again meaning some folks were cut higher, it still wasn’t the bloodletting expected.

Now, the experts say RBL and BBR will really be in trouble in spring 2016.

So, you might ask, what exactly is going on here. The industry was scared during both redeterminations in 2015, but – apart from companies that simply couldn’t handle their balance sheets in a downturn – credit accounts have largely remained unscathed. Is someone crying wolf, or has paranoia sunk into the industry?

When he returned my panicked call to his cell phone, Skip York, vice president of integrated energy at Wood Mackenzie, set me straight.

As it turns out, like just about everything else in the energy space, it comes down to fundamentals – specifically here, oil prices.

Banks use a metric based on oil prices 12 months behind the covenant date. So when they were looking at where to put money this spring, they were looking at prices from last spring when oil was trading close to $100 per barrel. In the fall redetermination, prices analyzed were lower because the downturn had started, but they were still in the $60s and $70s per barrel.

But in March 2016, there will be more $40 oil in the mix, and that’s what changes the equation and can make all the difference next year for energy companies on the brink.

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