In addition to the pressure U.S. oil and gas producers face to stop spending for growth and return some cash to shareholders, S&P Global Ratings worries that lenders may tighten company credit lines in the next two years, taking away the lifeline that saved many exploration and production companies during the 2015-2016 downturn on crude oil prices.
With $71 billion in bonds coming due in 2019 alone, Global Ratings looked at 120 credit facilities, or lines of credit for companies, that are due to mature in the next six years. The rating agency wondered how flexible banks will be in renewing that access to credit in a flatlining commodity market.
"The sector's inherent volatility complicates the maturity cliff because if market conditions go south, many companies' liquidity could follow," Global Ratings credit analyst Paul Harvey said in a Sept. 28 note. "This could lead to poor financial performance, or possibly even bankruptcies for deeply speculative-grade companies if weak conditions persist."
Global Ratings assumed $50 per barrel oil through 2018 and $55/bbl oil afterward and $3/MMBtu gas pricing.
Harvey expects that small and regional banks will be the first to pull back on their exposure to oil and gas companies and the most likely candidates for any resulting liquidity crunch will be oilfield service companies and lower-rated, speculative grade drillers.
"Most lenders generally played ball during the 2015-2016 downturn when compliance with maintenance covenants and asset values set in a $100-per-barrel world seemed a fantasy," Harvey said. "Lenders in most cases provided adequate covenant relief and worked with companies to lower borrowing bases, while still leaving them with some liquidity."
"We've recently begun to hear that lenders are tiring of supporting negative cash flows, particularly because of the relatively flat commodity prices," Harvey continued. "If this weariness leads lenders to stem their support by requiring more restrictive covenants or indentures that would limit negative cash flow, it would be a rude awakening for an industry that has typically put growth before positive cash flow."
Global Rating's lending sources are starting to echo the recent "live within cash flow" mantra of oil and gas investors.
Wolfe Research LLC analyst Paul Sankey said disgruntled investors are starting to demand that producers take the pledge to return money to shareholders and companies better listen.
After Anadarko Petroleum Corp. announced it would use cash to buy back $2.5 billion in shares through 2018 instead of drilling more, Sankey wrote "Hallelujah!"
"Our sincere hope is that we now enter a virtuous circle of prioritization of cash returns over growth across the E&P space," he said. "Once one makes the pledge, the others are lagging. Anadarko is notorious for spend-to-grow, and this is a major shift."
Guggenheim Securities analyst Subash Chandra has been banging the drum that E&Ps with wildcat hearts no longer have rich uncles on Wall Street. "Top relative performance by companies such as [Cabot Oil & Gas Corp.] and [ConocoPhillips] suggest to us that 'return-of-capital' is preferred against outspend or cash flow neutrality," Chandra said in early August. "This reflects a perception that the oil and gas industry is mature, so growth and investment is not rewarded as before."
In their second-quarter earnings reports, both Cabot and Conoco reported underspending their cash flows from operations and pledged to return some of that money to shareholders.
Complicating the situation for lenders and E&Ps are two wild cards, S&P Global Ratings' Harvey said: OPEC oil production and global GDP growth. "We think U.S. GDP expansion will slow to 2% in 2019 from 2.3% in 2018, while China's could slacken to 5.9% from 6.3% over the same period," Harvey said. "Slower growth could spook markets, lead to lower demand for transportation fuels, and hurt crude oil and natural gas prices at the same time companies need to refinance."
"The expected OPEC meeting in the spring of 2018, in the midst of many of companies' efforts to refinance their 2019 credit facilities, adds extra uncertainty to an already troublesome situation," Harvey said. "If supply and demand are not seen to be balancing, it could result in a swift fall in crude oil prices and more cautious lending."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.