Released April 06, 2020 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude oil prices soared about 30% late last week, driven by the potential for a coordinated production cut between OPEC nations, Russia and the U.S. But even if cuts can be agreed to, some analysts believe that will only be a temporary reprieve from the deep financial trouble facing many independent
For more on how E&P firms have been affected by the COVID-19 pandemic and the crude oil price war, see March 30, 2020, article - Oil Market: Where is the Bottom? and March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War.
Last week, before hopes of an U.S.-OPEC+ summit emerged, law firm Haynes & Boone LLP (Dallas, Texas) released its semi-annual survey of borrowing base redeterminations. These are semiannual meetings, typically held in the spring and fall, between lenders and E&P borrowers who have pledged their assets as collateral for loans. Twice a year, lenders and borrowers meet to recalculate the value of the assets pledged as collateral.
In better times, when crude oil prices were higher, those redetermination conversations likely would include expanding or extending a borrower's loans and lines of credit. But today, with West Texas Intermediate (WTI) plummeting about 66% during the first quarter, the conversations taking place at those redetermination meetings are more likely to center on calling a loan, shrinking a line of credit, or increasing the collateral a borrower must put up to back a loan.
Summarizing the sentiment of respondents to its spring 2020 survey, the law firm said, "A rapid deterioration in market conditions that started on March 8, 2020, resulted in deep pessimism for the spring 2020 borrowing base outlook." In a separate report on E&P bankruptcies, the firms said more than 200 producers have filed for Chapter 11 bankruptcy in the five-year period through the end of 2019.
Click on the image at right to see a chart on the number of E&P companies that have filed for Chapter 11 protection between January 1, 2015, and December 31, 2019.
The latest Haynes & Boone borrowing base redeterminations survey, released April 1, came the same day that Whiting Petroleum Corporation (NYSE:WLL) (Denver, Colorado) became the first major shale-focused driller to file for Chapter 11 bankruptcy protection.
Analysts said Whiting was the first, but won't be the last, E&P firm to file for Chapter 11 reorganization.
In an e-mailed statement, Bernadette Johnson, vice president of the Strategic Advisory Group at Enverus (Austin, Texas), told Industrial Info: "Whiting is the first and we're very likely to see more. The main drivers of a filing are still likely to be a company's debt load, hedge coverage and how much debt they have rolling over this year --not necessarily the region they are in."
"A company with 2020 bond maturities, significant debt and little hedge coverage is much more likely to file for restructuring, and there are several operators out there that fit in this category," she continued. "Any companies with early 2021 bond maturities will be next up if this low price is sustained for most of 2020. There is very little hedge coverage once you get to 2021."
Whiting had already cut one-third of its staff last summer, but the steep decline of oil prices, triggered by demand destruction caused by the COVID-19 pandemic and exacerbated by the Saudi-Russian oil price war, has flooded an over-supplied global market with crude oil.
U.S. producers have contributed to this crisis too, as domestic crude oil production, mainly from unconventional formations, has more than doubled in the last decade, reaching a record of about 13 million barrels per day (BBL/d), according to the Energy Information Administration.
Click on the image at right to see a chart of rising U.S. crude oil production.
The same day Whiting filed for bankruptcy protection, oilfield services company DMC Global Incorporated (NASDAQ:BOOM) (Broomfield, Colorado) let go about 33% of its employees, according to a report in The Denver Post.
In a statement, DMC said a steep decline in energy demand has resulted in a sudden slowdown in well-completion activity, reducing orders for DynaEnergetics' well perforating systems. Kevin Longe, president and chief executive officer of DMC, added: "This workforce reduction is a difficult and unfortunate process, but it is essential we realign the size of our organization to match the smaller size of our addressable market." He added: "We hope to offer impacted employees an opportunity to rejoin the company when our markets improve."
The Haynes & Boone survey included 207 respondents. Roughly 80% of responses came from E&P firms and financial institutions. The remaining responses came from oilfield service companies, private equity (PE) firms and professional services providers.
Those who responded to the survey after March 6, when the Saudi-Russian oil price war began, said they expect banks to "make deep borrowing base cuts in response to the recent free fall in commodity prices," the law firm said. But those who responded to the survey before the price war broke out "were only moderately pessimistic about the upcoming redetermination season," Haynes & Boone said.
Most of the lenders surveyed after the start of the price war said they expected borrowing bases to be reduced by 20% to 30%, although a smaller number felt a 40% cut or a 10% cut were possible. That range of response largely was mirrored by responses from borrowers, though a small minority of borrowers said they were expecting their borrowing base to increase by as much as 40% or more.
When asked what percentage of anticipated future production have reserve-based credit facility borrowers hedged for the next 12 months, most borrowers said between 50% and 70% of their production for the next 12 months is hedged. The law firm commented that although "producers are entering this downturn relatively well-hedged, the key question is whether producers will keep these hedges in place to preserve cash flow or immediately monetize them to enhance liquidity."
The near-total loss of access to the equity market was revealed in a question about future sources of capital. In prior years, between one quarter to one half of respondents said they planned to access capital from public equity markets, but the current survey showed only 2% plan to tap public equity markets for capital.
Finally, the Haynes & Bone survey showed that environmental, sustainability and governance (ESG) issues are expected to have a growing importance on E&P companies' access to capital. More than four in 10 (43%) said they expected E&P companies' access to capital would be "very" or "fairly" impacted by ESG issues.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook-Twitter-LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.
For more on how E&P firms have been affected by the COVID-19 pandemic and the crude oil price war, see March 30, 2020, article - Oil Market: Where is the Bottom? and March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War.
Last week, before hopes of an U.S.-OPEC+ summit emerged, law firm Haynes & Boone LLP (Dallas, Texas) released its semi-annual survey of borrowing base redeterminations. These are semiannual meetings, typically held in the spring and fall, between lenders and E&P borrowers who have pledged their assets as collateral for loans. Twice a year, lenders and borrowers meet to recalculate the value of the assets pledged as collateral.
In better times, when crude oil prices were higher, those redetermination conversations likely would include expanding or extending a borrower's loans and lines of credit. But today, with West Texas Intermediate (WTI) plummeting about 66% during the first quarter, the conversations taking place at those redetermination meetings are more likely to center on calling a loan, shrinking a line of credit, or increasing the collateral a borrower must put up to back a loan.
Summarizing the sentiment of respondents to its spring 2020 survey, the law firm said, "A rapid deterioration in market conditions that started on March 8, 2020, resulted in deep pessimism for the spring 2020 borrowing base outlook." In a separate report on E&P bankruptcies, the firms said more than 200 producers have filed for Chapter 11 bankruptcy in the five-year period through the end of 2019.
Click on the image at right to see a chart on the number of E&P companies that have filed for Chapter 11 protection between January 1, 2015, and December 31, 2019.The latest Haynes & Boone borrowing base redeterminations survey, released April 1, came the same day that Whiting Petroleum Corporation (NYSE:WLL) (Denver, Colorado) became the first major shale-focused driller to file for Chapter 11 bankruptcy protection.
Analysts said Whiting was the first, but won't be the last, E&P firm to file for Chapter 11 reorganization.
In an e-mailed statement, Bernadette Johnson, vice president of the Strategic Advisory Group at Enverus (Austin, Texas), told Industrial Info: "Whiting is the first and we're very likely to see more. The main drivers of a filing are still likely to be a company's debt load, hedge coverage and how much debt they have rolling over this year --not necessarily the region they are in."
"A company with 2020 bond maturities, significant debt and little hedge coverage is much more likely to file for restructuring, and there are several operators out there that fit in this category," she continued. "Any companies with early 2021 bond maturities will be next up if this low price is sustained for most of 2020. There is very little hedge coverage once you get to 2021."
Whiting had already cut one-third of its staff last summer, but the steep decline of oil prices, triggered by demand destruction caused by the COVID-19 pandemic and exacerbated by the Saudi-Russian oil price war, has flooded an over-supplied global market with crude oil.
U.S. producers have contributed to this crisis too, as domestic crude oil production, mainly from unconventional formations, has more than doubled in the last decade, reaching a record of about 13 million barrels per day (BBL/d), according to the Energy Information Administration.
Click on the image at right to see a chart of rising U.S. crude oil production.The same day Whiting filed for bankruptcy protection, oilfield services company DMC Global Incorporated (NASDAQ:BOOM) (Broomfield, Colorado) let go about 33% of its employees, according to a report in The Denver Post.
In a statement, DMC said a steep decline in energy demand has resulted in a sudden slowdown in well-completion activity, reducing orders for DynaEnergetics' well perforating systems. Kevin Longe, president and chief executive officer of DMC, added: "This workforce reduction is a difficult and unfortunate process, but it is essential we realign the size of our organization to match the smaller size of our addressable market." He added: "We hope to offer impacted employees an opportunity to rejoin the company when our markets improve."
The Haynes & Boone survey included 207 respondents. Roughly 80% of responses came from E&P firms and financial institutions. The remaining responses came from oilfield service companies, private equity (PE) firms and professional services providers.
Those who responded to the survey after March 6, when the Saudi-Russian oil price war began, said they expect banks to "make deep borrowing base cuts in response to the recent free fall in commodity prices," the law firm said. But those who responded to the survey before the price war broke out "were only moderately pessimistic about the upcoming redetermination season," Haynes & Boone said.
Most of the lenders surveyed after the start of the price war said they expected borrowing bases to be reduced by 20% to 30%, although a smaller number felt a 40% cut or a 10% cut were possible. That range of response largely was mirrored by responses from borrowers, though a small minority of borrowers said they were expecting their borrowing base to increase by as much as 40% or more.
When asked what percentage of anticipated future production have reserve-based credit facility borrowers hedged for the next 12 months, most borrowers said between 50% and 70% of their production for the next 12 months is hedged. The law firm commented that although "producers are entering this downturn relatively well-hedged, the key question is whether producers will keep these hedges in place to preserve cash flow or immediately monetize them to enhance liquidity."
The near-total loss of access to the equity market was revealed in a question about future sources of capital. In prior years, between one quarter to one half of respondents said they planned to access capital from public equity markets, but the current survey showed only 2% plan to tap public equity markets for capital.
Finally, the Haynes & Bone survey showed that environmental, sustainability and governance (ESG) issues are expected to have a growing importance on E&P companies' access to capital. More than four in 10 (43%) said they expected E&P companies' access to capital would be "very" or "fairly" impacted by ESG issues.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook-Twitter-LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.
