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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Banks Give A Stay Of Execution On Oil And Gas Sector

Banks Give A Stay Of Execution On Oil And Gas Sector

There have been a lot of observers (including myself) worried lately about debt in the oil patch, with suspicions running high that lower oil prices will mean cuts to bank lines -- and possible bankruptcies for some cash-strapped producers.

But a study released late last week by industry insiders shows petro-finances are doing much better than expected.

As reported by RBN Energy, cuts to E&P banklines have so far been small. With borrowing bases for 17 companies reporting so far having decreased by an average of only 4 percent. Related: Stop Blaming OPEC For Low Prices

RBN found that results from annual credit reviews were mixed for these 17 firms. With only six companies having their credit lines decreased by the bank. By contrast, eight firms saw their credit lines remain unchanged -- while three of the 17 actually had their credit increased by bankers.

These are very positive results for the E&P sector. Fears had been running high that banks would rein in credit lines much more severely -- given that many of these credit facilities are based on the value of in-ground reserves, which are obviously much lower at $50 crude than at $100. Related: Pain For Oilfield Services Will Continue Even If Oil Prices Rebound

RBN's analysis found that a few factors are helping stave off the knife when it comes to energy credit. For one, costs for drilling and completions have come down a lot this year -- with E&Ps paying up to 25 percent less for wells in 2015 than they were in 2014.

E&Ps are also getting some slack because banks are using elevated projections for the oil price. With many major lenders modeling reserves based on $70 crude just a few years out on the futures curve. Related: Geothermal Energy Could Soon Stage A Coup In Oil And Gas

All of that makes reserves more valuable -- and justifies continued credit availability to the sector. There are some credit shipwrecks out there -- with three firms in the RBN analysis seeing significant credit cutbacks, including Resolute Energy (39 percent decrease in credit lines), Emerald Oil (-40 percent), and New Source Energy (-51 percent). But generally, the sector is fairing much better than expected.

That gives E&Ps a financial reprieve until next spring -- when banks traditionally review credit lines again. Energy developers take note.

Here's to staying in the black,

Dave Forest

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