In late September, during the peak of fall borrowing base redetermination, many oil and gas companies got their first glimpse of just how bad their liquidity would get when, as a result of collapsing commodity prices, the value of their collateral crashed after PV-10s plunged by up to 80 percent Y/Y as of December 2015...
... and resulted in plunging access to secured liquidity as borrowings bases were eviscerated as much as 38 percent (for those unfamiliar with the basics of the semiannual redetermination process, the WSJ has a handy and brief 101). Related: Low Oil Prices Forcing Saudi Arabia To Modernize Economy
Incidentally, it would have been far worse if the Dallas Fed and OCC had not stepped in and told lender banks to take it as easy on the debtors as possible and, in some cases, even suspend market-based calculations for price decks. The reason for this kid glove treatment was that many banks were unprepared to reserve and write down the value of their energy loans down to fair values as of the fall.
Now, six months later, neither the OCC nor the (Dallas) Fed will be quite as generous in demanding that banks act as a benevolent cartel. In fact, from what we have heard, it will be quite the opposite, which explains the urgent scramble by many banks to force their debtor clients to issue equity and use the proceeds to repay secured loans.
As such, the imminent spring redetermination may prove to be just the catalyst needed to push the recently latent energy crisis to the next level.
So which companies are most at risk of a sudden air pocket in liquidity? For the answer we go to a recent Bloomberg Intelligence slide deck prepared precisely for the purpose of showcasing the companies with maxed out credit lines. These are as follows:
However, while these companies certainly have pulled the short stick, ironically they may not be the first to go: after all, at least they had the foresight of using up their entire available revolvers (and in the odd case of PostRock, more than 100% of it) - it doesn't matter if now the banks decide to collapse their borrowing base - the funds have already been wired and good luck getting a refund. Related: Oil Prices Beyond WTI And Brent
No, the companies most at risk may actually be those that currently have some of the most highly utilized borrowing bases, ranging anywhere from 62 percent for Contango to 94 percent for Vanguard. It is these companies that will suddenly find themselves with zero incremental sources of liquidity as the banks proceed to whack anywhere from 30 to 50 percent of their borrowing base, leaving them scrambling to preserve liquidity and ultimately leading to bankruptcy court. This is in no small part under the pressure of secured and soon to be DIP lenders (and in most cases, the post reorg equity) who will demand the least amount of Enterprise Value be wiped out in the months before bankruptcy. Here are the names.
We would be most worried about the near-term viability of the companies shown above: in our humble opinion these are the companies most at risk from the upcoming spring redetermination period. Related: Las Vegas Streetlights To Be Powered By Pedestrians’ Footsteps
As for the companies shown below, we would not be quite as worried about them, although we are confident that in a few weeks time these "largest borrowing bases" will be substantially smaller.
Finally, courtesy of Haynes and Boone, here is a less impartial perspective thanks to a poll of banks, PE firms, and oil service companies who were asked to share their thoughts on the upcoming spring redetermination. Among the key findings:
• Overall respondents expect 79 percent of the borrowers to see a decrease in their borrowing base in spring 2016
• Overall respondents, on average, expect to see borrowing bases to decrease by 38 percent compared to what they were in fall 2015
• As to the most likely path to be taken by lenders and borrowers who face a borrowing base deficiency this spring: 36 percent of respondents said they would negotiate an amendment or extension with the lender; 31 percent said they would sell non-core assets; 15 percent said they would seek capital from a hedge fund or private equity fund; 4 percent said sell the company; 13 percent said restructure or declare bankruptcy
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