As oil flows in the US, so does borrowing power: Fuel for Thought

Credit lines for US oil and gas producers set to rise in 2018

US E&P companies needing cash for drilling are likely to hear good news from banks currently preparing to size up borrowing profiles, as upstream activity continues to tick higher.

With crude prices sustained at above $60/b, the upcoming round of credit-worthiness reviews could see bank lending increase by the low double-digits.

Haynes and Boone, in its spring 2018 survey of oil and gas borrowers and lenders, saw a "modestly improved" outlook for the upstream industry.

The survey, which polled dozens of upstream lenders, producers, and oilfield service providers, showed most expected a 10%-20% increase in E&P borrowing bases.

"That is the most positive response we've had since we started the survey in 2015," said Kraig Grahmann, head of Haynes and Boone’s energy finance practice group.

E&P borrowing bases will most likely inch up, particularly for those focused on the most impactful plays like the Permian, Ben Tsocanos, oil and gas director for S&P Global Ratings, said.

"I think banks are in a lending mood," Tsocanos said. "Oily Permian [Basin] companies especially will probably see meaningful increases of about 20%" in their ability to borrow money. "They're under less pressure  because corporate leverage is going down."

The first round of bank redeterminations usually take place in April-May, and the second round in October-November. Borrowing was largely flat in the October/November 2017 cycle.

But the positive outlook could spell even better prospects for the late-2018 round if oil prices continue at current levels, which will inspire confidence in the sector. Oil and gas drilling is brisk and rig counts continue to move up.

On Wednesday, investment bank Barclays estimated the top 40 US onshore producers would spend 9% more this year than they did in 2017, with Permian spending increasing 19% compared to relatively flat in other oil basins.

"As companies are drilling a lot this year, they can add reserves, and that will support increases in borrowing bases in the fall," Tsocanos said.

PRODUCERS TOUT LEVERAGE REDUCTIONS

S&P Global Ratings withdrew ratings on many E&P companies that went into bankruptcy since early 2015, although some have come back into debt markets seeking new ratings, Tsocanos said.

"If a company is paying $200 million-$300 million a year in interest, it's virtually impossible  to succeed," he said.

During the downturn, banks began to stipulate that producers cut their debt levels to 3.5 times debt-to-EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses), from the earlier customary five times. EBITDAX measures a company's operating performance.

But these days, many larger companies are touting 2.5, 2 or even 1.5 times debt/EBITDAX.

Analysts say increased drilling in second-half 2017 coupled with a large number of wells drilled but left uncompleted, amount to money in the ground for E&P operators, whose borrowing capacities are based in large part on oil and gas reserves.

But in the last few years, dozens of companies went through bankruptcy.

According to Haynes and Boone's most recent Oil Patch Bankruptcy Monitor, 144 North American E&P companies filed for bankruptcy between the start of 2015 through first-quarter 2018. Collectively, their debt, secured and unsecured, totaled $90 billion.

Interestingly, two of this year's crop of six operators were among the larger filers of the last three years.

Privately held Fieldwood Energy and Exco Resources, a public company, together accounted for 86% of the $7 billion of debt represented by year-to-date bankruptcy filings.

The relatively bigger size of those operators and their greater production bases may have given them the ability to stall off bankruptcy for awhile and "kick the can down the road" until oil prices climbed a bit, said Grahmann.

In any case, "we certainly expect the pace [of bankruptcy filings] will be slower in 2018 than in the last year and a half," Grahmann said.

The survey also showed oil and gas companies on average have 50% to 60% of their production hedged this year, and that most plan to use cash flow from operations, bank debt and private equity as their primary sources of capital in 2018.

In fact, most larger public producers have openly touted their intention to spend within cash flows – a mantra not heard from the oil industry in years.