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Market Cap £74.81bn
Enterprise Value £213.52bn
Revenue £27.11bn
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Small oil-and-gas companies get cold shoulder from large banks

Mon 28th October, 2019 5:00am
By David French and Jessica Resnick-Ault
    NEW YORK, Oct 28 (Reuters) - The largest banking lenders to
the oil and gas sector are becoming more cautious, marking down
their expectations for oil and gas prices that underpin loans in
a move expected to put further financial stress on struggling
producers, industry and banking sources said.
    Major banks including JPMorgan Chase  JPM.N , Wells Fargo
 WFC.N , and Royal Bank of Canada  RY.TO  have, as part of
regular biannual reviews, cut their estimated values for
oil-and-gas companies' reserves, which serve as the basis for
those companies to receive reserve-based loans (RBLs), according
to more than a dozen sources familiar with the activity.
    While the size of the RBL market is unclear, it is estimated
that a few hundred companies take such loans, with the
cumulative size in the billions of dollars.
    Those lenders have marked down the perceived value for both
oil and natural gas for the coming five years, with the changes
kicking in as early as this month.
    Expected natural gas prices have been cut by around $0.50
per million British thermal units, about 20% below levels set in
the spring. Industry sources are forecasting some firms face a
15% to 30% reduction in loan size as a result. Oil prices are
expected to be about $1 to $2 lower than spring estimates.
    "Some banks believe they have too much energy exposure and
want to reduce some of this risk," said Ian Rainbolt, vice
president of finance at Warwick Energy, a private equity firm
with upstream investments in Oklahoma and Texas. 
    That is a threat to smaller companies, which are already
struggling to find other methods of financing - such as issuing
stock or bonds - as investors grow restless with years of poor
returns in the shale sector even as the United States has risen
to become the world's largest oil and gas producer. 
    Reduced funding could slow growth in U.S. oil and gas
production, and also threaten more bankruptcies in the sector.
Bankruptcy filings among U.S. oil and gas producers are at
levels not seen since 2016, when U.S. crude slumped to $26 per
barrel, according to law firm Haynes and Boone.
    Companies heavily focused on natural gas drilling may be the
most threatened. Banks are forecasting natural gas prices
between $2 and $2.35 per million British thermal units for the
next 12 months, and up to $2.50 at the end of the five-year
term, all lower than in the spring.
    "I expect the biggest issues to be with over-leveraged
natural gas producers, especially those without firm
transportation in geographically-disadvantaged areas," said
Brock Hudson, managing director at investment bank Carl Marks
Advisors, who referenced companies in Appalachia, the Rockies
and parts of Oklahoma.
    Smaller RBLs can have huge consequences: Alta Mesa
Resources, an Oklahoma-focused producer headed by former
Anadarko Petroleum chairman Jim Hackett, filed for bankruptcy a
month after its borrowing base was slashed by almost half in
mid-August.  urn:newsml:reuters.com:*:nFWN26309S
    A number of banks, including JP Morgan, Wells Fargo, and
Comerica Inc  CMA.N , declined to comment or did not respond to
requests for comment.
        
    REDUCED AVAILABILITY   
    Eight sources indicated larger banks have set their price
decks, the industry term for the value they will ascribe to
hydrocarbons behind the RBLs, with oil between $46 and $51 per
barrel for the next five years.
    There are fewer financing options available to help bridge
the gap from lower RBLs. Just one U.S. producer, Contango Oil &
Gas  MCF.A , has issued any new equity in 2019, while there has
only been one high-yield bond offering by a shale producer since
March, according to Refinitiv data. 
    Since 2018, the S&P 500 Energy Sector  .SPNY  is the worst
performing sector in the Standard & Poor's 500, falling 18%
against a 12.8% increase for the broader index, and many
publicly-traded shale companies have done even worse.
    Those facing lower loan guarantees also can not rely on
selling unwanted assets to raise cash as mergers and
acquisitions activity is at its lowest level in a decade.
Profiting from further production is also difficult, as the
number of active oil and gas rigs is at its lowest level since
April 2017, according to Baker Hughes.  urn:newsml:reuters.com:*:nL2N27A0L0
    Scott Richardson, head of U.S. energy investment banking at
RBC Capital Markets, said any uptick in bankruptcies would
likely come from the SCOOP/STACK area of Oklahoma and the
gas-heavy southern portion of Texas' Midland Basin.
    Loan covenants are also being tightened, according to a
Dallas Federal Reserve Bank energy survey published Sept. 25.
The survey said some participants noted banks had lowered the
maximum debt level permissible to 2.5 to 3 times earnings before
interest, taxes, depreciation and amortization (EBITDA), from
3.5 to 4.0 times.
    Some regional lenders have kept prices for oil and gas in
fall's redetermination higher than the larger institutions,
according to three of the sources.  
    Warwick's Rainbolt, who has oversight over four RBLs, said
it was switching to regional banks, which offered better price
decks. One bank priced gas starting at $2.37, rising to above $3
in the final year, with crude at $52 rising to near-$60 a
barrel.

 (Reporting by David French and Jessica Resnick-Ault in New
York; Editing by David Gaffen and Daniel Wallis)
 ((davidj.french@thomsonreuters.com; +1 646 223 5211; Reuters
Messaging: davidj.french.thomsonreuters.com@reuters.net))
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