Improved outlook as redeterminations trend upward

WHEN ASKED to make predictions about the financial state of the oil and gas market by Haynes and Boone LLP, a majority of those surveyed-163 participants representing a broad cross-section of the industry including executives at oil and gas producers, oilfield services companies, banks, and private equity firms-were optimistic, even if some only modestly so.

"We're seeing that many in the industry view the market with more optimism," said Haynes and Boone Houston Partner Jeff Nichols, co-chair of the firm's Energy Practice Group, in early April after the spring 2017 survey results were released.

When asked specifically about what the likely outcome of the traditional producer/lender meeting to assess borrowing capacity would be, respondents said they expect that 76% of producers will see borrowing bases increase slightly or remain unchanged compared to their fall 2016 borrowing bases. When the firm conducted the survey in the fall of 2016, respondents expected only 59% of producers to see borrowing bases increase or remain unchanged.

In another upward trend, almost all of the respondents (89%) expect E&P companies to increase capital expenditure budgets in 2017. Last year, nearly two-thirds of those surveyed expected substantial budget increases of 20% or greater.

But let's get back to those borrowing base redeterminations. Among those respondents predicting that borrowers will see an increase, most expect the increase to be about 10% above fall 2016 borrowing bases.

I reached out to Haynes and Boone for an update.

"Borrowing base redetermination season is still ongoing, but most companies who have announced had outcomes that are consistent with our survey predictions. Oasis Petroleum, WildHorse Resource Development, Concho Resources, Carrizo Oil & Gas, and Swift Energy all recently announced modest-and in some cases, significant-increases," said Kraig Grahmann, partner in the Energy Practice Group at Haynes and Boone, and head of the firm's Energy Finance Practice Group.

"There have been some borrowing base decreases, but they are not as widespread as they were in 2015 and 2016," he continued.

Let's look quickly at some of the increases. I don't know what the threshold is between modest and significant, but Oasis Petroleum's borrowing base is up 39% from $1.15 billion to $1.60 billion. WildHorse Resource's 15 lender bank group increased the company's borrowing base 24% from $363 million to $450 million. Concho is up 7% from $2.8 billion to $3.0 billion. Carrizo's banking syndicate, led by Wells Fargo as administrative agent, increased the borrowing base from $600 million to $900 million. Carrizo, however, elected to take a lower commitment of $800 million. Swift Energy was oversubscribed on its amended and restated senior secured credit facility, and its borrowing base increased by 32% to $330 million. JP Morgan led the facility and was joined by a syndicate of eleven banks, including six new lenders.

I can go on. Eclipse's borrowing base increased 40% from $125 million to $175 million. Vine Resources' borrowing power is up 40% from $250 million to $350 million, and Jagged Peak Energy is up 13% from $160 million to $180 million. WPX Energy's borrowing base increased to $1.2 billion from $1.025 billion, and Halcón Resources received commitments for a $650 million borrowing base-an increase of $50 million.

Will the increase in borrowing capacity result in companies significantly increasing debt loads? The short answer is: probably not, said Grahmann.

"E&P companies are spending more on drilling and buying more properties than they did in the downturn, but the significant capital destruction that occurred in 2015-2016 as a result of the commodity price collapse is something that producers-and their capital providers-are still mindful of. Loans are being made and equity and bonds are being issued, but everyone is still very focused on not being over-levered. Additionally, a number of reserve-based credit facilities have recently included an "elected commitment" concept, a mechanism which allows the lenders to commit to making their share of loans to the borrower at an amount below the borrowing base."

We're also unlikely to see suspensions of redeterminations such as those seen by Chesapeake, Grahmann continued.

"The Chesapeake borrowing base holiday that was agreed to in April 2016 and allowed Chesapeake to skip its fall 2016 redetermination is a unique concept not generally used in the reserve-based lending world," he said, noting that suspensions "were used in a handful of other distressed credit facilities at the outset of the downturn, but the updated regulatory guidelines published by the OCC in March 2016 very quickly limited banks' ability to 'kick the can (barrel) down the road.'"

Exceptions, though, include some reserved-based credit facilities for companies exiting bankruptcy, he explained. Some "include some form of a borrowing base redetermination holiday (usually 12 to 18 months)" that gives unsecured creditors converting debt to equity "some assurance that the company will have time after bankruptcy emergence to eliminate any remaining non-conforming portion of its borrowing base and otherwise achieve a proper balance of the reserves and the borrowing base debt (through asset sales, development drilling, or hoped-for oil price increases, etc.) without having to worry about the lenders creating another borrowing base deficiency."

Based on the redeterminations mentioned in this writing, spring redetermination season is off to an even better start than expected.