Rigzone Quotes Bill Morris on Hedging, E&P Co. Reserves

For its article “Spring Debt Check The Bellwether That Squeezes Oil, Gas Companies?,” Rigzone quoted Akin Gump oil and gas partner Bill Morris on possible steps that exploration and production (E&P) companies will need to take as credit tightens in a low-price energy environment.

On the topic of energy companies and hedging, Morris said that companies need to increase their reserves, noting that “hedges are rolling off and…are not being replaced with hedges that bring them a lower price. There was some tightening, but relative to the tightening that you saw in the 80s, banks were very liberal.”

He continued, “Hedging slows down the reaction to the banks to the decline in hydrocarbon prices. We’ll see what happens come next spring and where oil prices are. If oil prices stay where they are, then I think you’ll see further tightening in the borrowing base, simply because higher priced hedges – hedges that net the oil company more revenue – will continue to roll off.” He added that cuts in capital expenditures will result in less replacement or reserve increases due to reduced drilling activity.

Discussing the questions of an E&P company’s reserves, Morris said, “The fall reductions in the 5 to 10 percent range were pretty common. For anyone getting cut more than that, I think you’re looking at somebody who didn’t replace their reserves. It’s an issue for the marginal players and players in places where the cost of production is higher. We’re already seeing some bankruptcies and we’re already seeing an uptick in interest from people who either want to go through restructuring or from people who want to acquire the debt of companies as a vehicle to ultimately acquire the equity in the companies.”