Bank cut to oil loans could push producers beyond the brink

Rose Hill Acquisition

30/03/2020 15:48

By David French, Jessica Resnick-Ault and Jennifer Hiller
    NEW YORK/HOUSTON, March 30 (Reuters) - U.S. energy producers
face the threat that banks will slash their credit as March's
crash in oil prices means the asset backing their main loan
facility - crude reserves - is worth less than half of what it
was a month ago. 
    The oil price collapse has crushed U.S. energy companies,
sending valuations spiraling and squeezing financing options, as
they face a likely 20% drop in worldwide oil demand in coming
quarters due to the coronavirus pandemic.    
    U.S. crude prices have dropped to about $20 a barrel as the
number of virus cases exploded worldwide and destroyed demand
while top producers Saudi Arabia and Russia ended an alliance to
curb supply - and promptly started ramping up production to
maximum capacity.
    For the shale industry, the twin supply-and-demand shocks
could not come at a worse time. The industry's key financing
tool - loans backed by proven oil and gas reserves - is facing a
semi-annual pricing review.
   Banks use U.S. crude prices to evaluate reserves, and with
oil falling from $61 a barrel on Jan. 1, those institutions
could cut borrowing lines by anywhere from 25% to 50%, according
to interviews with more than a dozen industry and financial
sources. 
    "I think it is fair to say that U.S. shale is about to
confront the biggest liquidity crunch in its history," said
Shaia Hosseinzadeh, managing partner at investment firm
OnyxPoint Global Management, who estimated the reserve-based
loan (RBL) market to be worth more than $200 billion.
    The correlation between falling oil prices and smaller loan
size is not exact. A company's resources fluctuate as it
discovers and extracts oil, reshaping the collateral behind the
loan, while different banks providing funds have alternative
values for crude, which adjusts the calculation.
    Around a third of all publicly listed U.S. oil and gas
producers could need a debt restructuring or to file for Chapter
11 bankruptcy protection this year, with RBL non-compliance the
likely trigger for many, according to forecasts from financial
and legal advisers who spoke to Reuters on condition of
anonymity to discuss sensitive matters.
    If U.S. crude averages $30 a barrel in 2020, more than half
of the 30 U.S. producers tracked by Raymond James would have a
net debt-to-EBITDA (earnings before taxes, interest and
amortization) ratio of 3 or more, it said on Thursday. That
level is traditionally considered where companies are in a
stressed leverage situation.  
    For financially stretched energy companies, a smaller RBL is
akin to slashing an overdraft line when it is being used to pay
everyday bills.
    Financing opportunities outside of this loan facility,
including equity and debt sales, have already dried up as
investors have long turned their backs on U.S. oil-and-gas
companies after record production volumes failed to translate
into profits for Wall Street.
   
    MOVING TARGET
    Lenders to the oil and gas industry were already showing
signs of caution during the last RBL review in the fall, with
major banks such as JPMorgan Chase  JPM.N  and Wells Fargo
 WFC.N  cutting their estimated values for oil-and-gas
companies' reserves.  urn:newsml:reuters.com:*:nL2N27D0AZ
    In total, 24 U.S. producers filed for bankruptcy in the
second half of 2019, the most in any six-month period since
2016, according to law firm Haynes & Boone. 
    That could accelerate as banks further cut their assumptions
for where oil prices will trade for the rest of this year,
impacting how much they lend out.
    At the start of March, before crude cratered, Citigroup
 C.N  was telling producers it planned to reduce the value it
ascribed oil by about $2 below fall prices in the mid-$40s,
according to a source briefed on the bank's plans. 
    Sentiment followed commodity prices lower. J.P. Morgan, one
of the largest lenders to the U.S. energy industry, responded by
cutting its value for oil in 2020 by a third to around $30 a
barrel, according to two sources familiar with the bank's
activities.
    Tulsa, Oklahoma-based BOK Financial Corp  BOKF.O , which has
the highest percentage of energy loans of any American bank,
revised its crude valuations twice in March due to the
substantial change in prices, a spokesman for the lender said.
    With oil prices volatile, it would be natural for banks to
err toward conservative valuations for collateral. Yet, each
lender price move shifts the chances of a producer retaining
enough RBL cash to survive.
    Citigroup and J.P. Morgan declined to comment.
    
    TRIGGERING
    Some American energy companies, including Lilis Energy
 LLEX.A  and Ultra Petroleum Corp  UPLC.PK , have already
breached covenants or admitted they cannot repay their loans.
 urn:newsml:reuters.com:*:nFWN2B90SZ urn:newsml:reuters.com:*:nASA00DPT
    Others, such as Rosehill Resources  ROSEU.O  and Whiting
Petroleum Corp  WLL.N , have drawn down on their loans since the
oil price slump, meaning any future reduction in RBL size could
leave them overdrawn.  urn:newsml:reuters.com:*:nFWN2BC1IE
    The wave of bankruptcies some expect might keep lenders from
taking harsh actions to pull in credit lines. In the 2014-2016
oil price slump, banks granted customers some leniency through
the formation of payment plans for deviant borrowers, giving
them some time to regain compliance, bankers said.
    Such moves would not be charity. Lenders are reluctant to
seize properties, especially when the market for energy assets
is so poor, and after being burned in recent oil bankruptcies. 
    Alta Mesa Resources' restructuring plan, which collapsed
earlier this month, had lenders getting back around half their
money, an uncommon event as banks traditionally get all their
cash returned as the highest-ranking creditors.  urn:newsml:reuters.com:*:nL1N2B32KD
    If banks took a hard line, there would be multiple sales
from company liquidations, said one oil and gas lawyer.
    "There aren't enough buyers for that. Banks would get
pennies on the dollar," he said.

 (Reporting by David French and Jessica Resnick-Ault in New York
and Jennifer Hiller in Houston; Additional Reporting by Joshua
Franklin in New York and Liz Hampton in Denver; Editing by
Daniel Wallis and Dan Grebler)
 ((Jessica.Resnick-Ault@thomsonreuters.com; 646-223-6052;))