Despite some bleak warnings and high debt levels, majorAppalachian shale gas producers survived the spring season for bankredeterminations with their access to credit nearly unscathed.
Half of the top 10 Appalachian producers did not have abanker at their door at all this spring because their debt is unsecured.Others, including the producer with the largest net debt/EBITDA ratio, survivedwithout large cuts. ChesapeakeEnergy Corp.'s net debt/EBITDA ratio stood at 6.40x on March 31,according to S&P Capital IQ data.
Cabot Oil& Gas Corp. was the only top-10 Marcellus/Utica shale producerthat had its borrowing base trimmed, from $3.4 billion to $3.2 billion.
Producers that secure debt with some or all of theirreserves get a better interest rate but have the dollar value of thatcollateral re-evaluated by the banks, normally semiannually. In an environmentof low prices for natural gas and oil, heavily extended drillers, and banksmade cautious by theindustry downturn and flinty-eyed regulators, started the year with a case ofnerves.
"We believe equity and debt markets are for all butthe highest quality E&P's," Jefferies & Co. analyst Jonathan Wolffsaid Dec. 28. "Spring bank redeterminations are coming and willlikely feature severe cuts to available liquidity. Leverage is generally highfor producers, meaning hefty cuts to budgets are likely."
As late as April, Barclays analyst Jeffrey Robertson worriedabout some of the producers he covered: "Liquidity and leverage remain akey concern for a small group within our universe as companies work throughcredit facility redeterminations, which will likely result in greaterreductions in borrowing bases compared with redeterminations lastfall."
The pressure was not caused solely by wildcatters overextendingthemselves unreasonably. "Pressure on banks to reduce exposure to theenergy sector could result in curtailed access to capital," Moody's saidin an April 21 note. "The borrowing base re-determination period comes ata time when banks are focused on limiting risks and potential losses of theirenergy portfolios, and therefore inclined to enforce stricter standards andextend less credit."
The rating agency continued, "Three-quarters of thecompanies we surveyed said they expected a reduction to their borrowings bases,with an average decline of more than 15%, and none expected an increase."
Each top producer slashed capital expenditures, ranging upto Cabot's 77% cut. Big spenders Southwestern Energy Co. and Chesapeake laid down alltheir remaining rigs in Appalachia — Southwestern stopped drilling nationwide —leaving Antero ResourcesCorp., EQT Corp.and Rice Energy Inc.as the most active drillers in Appalachia. But aside from Antero's seven rigs,they were not very active.
The experience of Texas crude drillers with the banks hasnot been as pleasant. EP Energy Corp., for example, had its borrowing base cut40% despite jumping through hoops to fix its balance sheet.
Topeka Capital Markets analyst Gabriele Sorbara told thetale May 9: "While the banks took an axe to its borrowing base to $1.65billion from $2.75 billion previously, the company received covenant reliefreplacing the 4.5x debt-to-EBITDAX covenant with a 3.5x first liendebt-to-EBITDAX covenant through the 1Q18."
Along the way to less borrowing capacity, EP Energy did whatthe credit rating agencies think is a caution, a distressed exchange of $609million in face-value debt for $287 million in new debt, while selling itsstake in Louisiana's Haynesville Shale for $420 million.
Appalachia was not without its casualties, and securedlending did not protect banks from suddenly owning part of a shale gas company.Chesapeake pledged a significant portion of its assets to keep its $4 billionbase intact. Marcellus and Utica shale driller emerged from bankruptcyprotection May 9 after swapping nearly $1 billion in debt forequity in the new, privately held company.