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Credit keeps flowing to natural gas drillers 'disciplined' by years of low prices

Many independent U.S. natural gas producers, particularly inAppalachia, haven't seen banks trim their credit like their shale oil peersduring this spring's bank redetermination season because of a disciplineinstilled through years of living with low commodity prices, an industryanalyst said at a Washington, D.C., think-tank April 28.

"They've been dealing with such a poor market for somany years," Energy Intelligence Editor Casey Sattler told attendees at apanel discussing the future financing of oil and gas development at the Centerfor Strategic and International Studies.

Major Appalachian drillers such as and havealready announced that bankers made no changes to their multi-billion dollarborrowing bases.

Shale gas producers had to develop a wide variety of tacticsto cushion their downside since prices collapsed, Sattler said, includingdeveloping sophisticated hedging strategies to protect their revenue streams.

Wellhead prices for U.S. natural gas began sliding in 2011to bottom out in April 2012 at $1.89/Mcf, according to U.S. Energy InformationAdministration figures. The 2016 NYMEX futures strip closed April 27's tradingday at $2.443/MMBtu, while spot prices at Marcellus Shale hubs in Pennsylvaniahave averaged $1.29/MMBtu for the 12 months previous to April 28, according toSNL data.

"The oil guys never really hedged. They were in andout. The gas guys are more disciplined," Sattler said at the paneldiscussing financial strategies going forward in a low priced environment.

"Oil comes out of the ground because money goesin," moderator Kevin Book, a top analyst at Washington's Clearview EnergyPartners, opened the discussion, acknowledging that forecasters and analystswere blindsided by the sudden collapse in oil prices over the last year."As an analyst, it is good to be paid for being so wrong."

"What's really going on?" he asked rhetorically.

Banks have financed the ability of U.S. oil and gasproducers to hugely outspend their cash flows in previous years and are nowpainted into a corner. They are devising new and imaginative ways to refinancedrillers to avoid having defaulted loans showing up on their books, the head ofa commodities trading consultancy said. "Banksare not in the oil business, they are in the interest business," saidAlbert Helmig, the former vice chairman of the NYMEX and now-CEO of Grey House.

"This is not the first time banks have seen this,"he said, equating the bank's oil and gas lending experience to previous decadeswhen they got in over their heads with foreign lending and renegotiatedbillions worth of debt to keep loans performing.

Sattler listed the variety of methods producers have used tokeep their operations running: from selling more stock to asset sales anddistressed debt exchanges; methods that come in and out of vogue as marketsentiment changes.

What lies ahead, Sattler and Helmig agreed, is largelyunknown. "There's a huge uncertainty — when the best acreage runs drythere's going to be lots of pain," Sattler said. "Revenues fromexisting production, which has held up stronger than expected, can cushion acompany's operations far better than we thought."

She predicted the pain of U.S. shale oil producers will beseen as they report first quarter earnings and the older hedges that protectedpricing are gone, leaving production naked to the market.

Equity raises have kept larger independents afloat,particularly pure-play companies in Texas' Permian Basin, but the market willlose patience with that if prices stay low and results do not improve, Sattlersaid.

Private equity investors are staying on the sidelines fornow, waiting to buy up assets cheap through the bankruptcy courts, Sattlersaid, while huge amounts of debt has made corporations shy about merging withan equally indebted partner.

The biggest unknown variable Helmig and Sattler agreed ismarket sentiment, which can turn on a dime.

"Market sentiment drives all things," Sattlersaid. "If market sentiment changes, the tools [M&A, asset sales,hedging] come back to the market."