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A Death Sentence For Small Oil & Gas Drillers

Some of the largest banks financing U.S. oil and gas drillers have recently reduced their expectations for oil and natural gas prices, determining the value of companies’ reserves and loans that they can take against those reserves.  

Wells Fargo, JP Morgan Chase, and Royal Bank of Canada, among others, have reduced the value of reserves of oil and gas companies, according to more than a dozen banking and industry sources familiar with the borrowing base redeterminations.

The value of reserves estimated by banks serves as the basis for many small oil and gas firms to get funding for their drilling activity and operations. And in recent months, in many cases, this is the only source of funding that many of them can get because the equity and bond markets are practically closed for small oil and gas firms right now.

With the lowered value of reserves, drillers now face an even more restricted access to capital than in previous months.

In the fall 2019 survey carried out in September by Haynes and Boone, for the first time since 2016, the majority of respondents expected borrowing bases to decrease in the redetermination season this month.

According to Reuters’ sources, the banks have cut their expectations for both natural gas and oil prices compared to the previous redetermination season this past spring. Natural gas price forecasts were slashed by around 20 percent, which industry sources say would mean a 15-30 percent cut in the size of loans. Banks now see natural gas prices at US$2.00-2.35 per million British thermal units (MMBtu) over the next 12 months. Oil prices are now US$1 to US$2 a barrel lower than estimated in the spring redetermination, according to the Reuters sources.

Related: Trump’s Latest Trade War Move Sends Oil Tanking

The lower borrowing base for loans could mean additional pressure on smaller U.S. drillers, as other forms of financing are not accessible now.

“Utilization of debt and equity capital markets as a source of capital for producers has gone from small in the spring 2019 survey to minuscule in the fall 2019 survey,” Haynes and Boone said in its survey just ahead of a of the redetermination season.

“E&P companies will remain boxed in on capital sources for a while. Public equity markets – a primary source of capital for upstream oil and gas companies before 2018 – will not reopen until 2021 or later,” Haynes and Boone noted.

By Tsvetana Paraskova for Oilprice.com

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