With the price of crude oil falling to new 52-week lows, weekly reports that inventories still exceed expectations and no indication that we have hit bottom, exploration and production companies continue to feel the pressure of tightened borrowing capabilities. However, despite the current environment, the recently completed borrowing base redeterminations generally countered forecasts of steep reductions.
Unsurprisingly, for the past two redetermination cycles, most analysts expected widespread reductions. When spring 2015 redeterminations saw lenders largely reaffirm borrowing bases, the continued price decline only heightened forecasts for across–the-board decreases this fall. Supporting these concerns, Macquarie’s fourth-quarter survey found that reserve-based lenders used a WTI price of $42.84/BBL to value assets compared to $78.53/BBL for the same period last year.1
However, despite expectations, actual overall reductions were not as drastic as feared. According to one study, companies that experienced reductions saw an average drop of approximately 19 percent, but approximately 50 percent of companies had their borrowing bases reaffirmed or even increased.2 Similarly, other studies found that many companies were able to maintain their borrowing bases at prior levels. Another study of 25 companies by Jefferies found that aggregate borrowing base capacity fell by only 2 percent,3 and a further review by Reuters found that recent redeterminations lowered lending by only approximately 4 percent, with the total credit available reduced by $1.4 billion.4
Analyses of the fall redeterminations generally attribute the lack of widespread reductions to lenders wanting to preserve their market reputation and avoid reductions that could imperil borrowers, along with measures taken by producers, including acquiring assets to increase proved reserves, proving up reserves and relying on hedging programs that locked in higher prices.
Even with many upstream companies weathering the past two rounds of redeterminations, similarly ominous predictions are likely for spring 2016 as prices continue to languish and producers see the value of their developed reserves slip along, with undeveloped reserves falling off their books.
1 http://static.macquarie.com/dafiles/Internet/mgl/com/macquarietristone/publications/energy-lender-price-survey/2015Q4.pdf?v=3; http://static.macquarie.com/dafiles/Internet/mgl/com/macquarietristone/publications/energy-lender-price-survey/2014Q4.pdf?v=4.