Energy players operating in the Permian Basin could soon find that lenders are more willing to loan them cash, as the recent oil rally breathes new optimism into an industry that took a beating in recent years.
The borrowing bases for companies in the hot-spot basin could be increased by as much as 40-percent, according to James Spicer, analyst at Wells Fargo & Co., based in part on projections for a 40 percent increase in production for 2018.
“The Permian Basin is the most prolific basin in the U.S. right now,” Spicer told BloombergMarkets in an interview.
Lenders meet with energy companies twice a year to evaluate reserves, which is then used together with price projections to determine the collateral for the loans.
The price of a WTI barrel today stands above $60, which compares to a sub-$35 barrel low back in January 2016—a price level that caused lenders to tighten the purse strings, forcing producers in some cases into bankruptcy.
Energy companies operating in other basins may not find such generosity, because breakevens in other basins are not as attractive. Parts of the Permian Basin offer breakevens as low as $25 per barrel, but other basins cost as much as $40 per barrel to produce, according to a report from the Federal Reserve Bank of Dallas at the end of March. The result is lower collateral, and therefore smaller loans.
While the Permian will have access to more cash this go around, others, too, will likely find it easier to borrow in this new price environment, including “extreme fossil fuel projects”—those in the Arctic, ultra-deepwater, LNG, coal mining and coal-fired electricity, according to OilPrice’s Nick Cunningham. The world’s largest banks, according to the report, Banking on Climate Change 2018, increased its lending for these extreme projects by 11 percent to $116 billion in 2017.
By Julianne Geiger for Oilprice.com
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