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Survey: Revolver cuts next as debt, equity windows close on drillers

U.S. oil and gas producers will probably see their lines of credit, or revolvers, clipped 10% after banks redetermine their credit limits this fall, according to a recently released survey of lenders and producers.

The cutback comes at a time when commodity crude and natural gas prices are falling and the stock and debt markets are effectively closed to drillers, but the primary cause is newfound caution by lenders, Buddy Clark, a partner at the law firm Haynes & Boone, which conducted the survey, said Oct. 4.

"Banks are becoming more conservative," Clark said in an interview. While bankers are concerned about low prices for futures contracts for oil and gas, Clark said lenders are no longer adding value to drillers' assets for unproven or undeveloped acreage, as they once had.

"In the heyday of the shale revolution, you had no problem getting credit for undeveloped leases," Clark said. Now, bankers "are getting back to basics. I don't think it's structural but reflective of more conservatism."

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Trimming credit lines comes at a time when only 28% of 221 industry participants in the survey said drillers were running on funds generated from operations. Most of the fresh cash to drill was coming from revolvers and sources that include private equity lenders, alternative debt providers, and joint venture partners. Only 5% of capital was coming from the public debt or equity markets, according to the survey, released Oct. 3. The survey included responses from executives at oil and gas producers, oilfield services companies, financial institutions, private equity firms and professional services providers.

"Utilization of debt and equity capital markets as a source of capital for producers has gone from small in the spring 2019 survey to minuscule in the fall 2019 survey," Haynes & Boone said. "Alternative capital providers are filling the void with debt financing — the percentage of respondents seeing debt from alternative capital providers as a primary source capital has doubled since spring 2019."

Narrowing credit lines should push drillers to cut back spending this year and next, analysts at Tudor Pickering Holt & Co. said Oct. 3. "Lenders seem to be taking a hard line on price decks with discussions circling around $46-48 WTI and $2.10-2.20 gas," Tudor Pickering Holt said. "Ultimately, lower decks could cut the last line of liquidity for industry and if the high yield market remains closed should push [exploration and production companies, or E&Ps] to cash flow neutral programs under any commodity price scenario."

The increasing need to depend on cash from operations has drillers hedging more production volumes to fixed futures prices to lock in cash flows than previously seen, Haynes & Boone said. "Respondents are reporting higher hedging levels than in prior surveys, indicating that producers are more focused on reducing commodity price risk," Haynes & Boone's presentation said.

"They have to protect against the downside," Clark explained, "even though [hedging] is not attractive" at low prices.

The oil and gas industry won't see looser markets anytime soon, Haynes & Boone said. "E&P companies will remain boxed in on capital sources for a while. Public equity markets — a primary source of capital for upstream oil and gas companies before 2018 — will not reopen until 2021 or later."

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