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A growing number of banks are restricting access to funding to the U.S. shale industry in the wake of the oil price crash, although the aversion to lending more capital to losing U.S. shale operations was already evident before the pandemic and the Saudi-Russian oil price war.
Lenders already cut their borrowing bases for the smaller U.S. shale producers in the spring, and more cuts to the amounts of loans drillers can take against their oil and gas reserves are coming in the fall in the second borrowing base redetermination for the year, analysts tell Bloomberg.
In the spring, just after the oil price collapse, a survey by law firm Haynes and Boone among oil and gas producers, oilfield services companies, financial institutions, and private equity firms showed that a sizable majority of respondents expected borrowing bases to decrease by at least 20 percent in response to the commodity price crash, while 45 percent of respondents expected even deeper cuts of 30 percent or more.
Some companies saw huge cuts to their borrowing bases. Oklahoma City-based Chaparral Energy, for instance, saw its borrowing base slashed by lenders from US$325 million to US$175 million in April. Houston-based Oasis Petroleum said its borrowing base was decreased from US$1.3 billion to US$625 million and aggregate elected commitments were set at the level of the borrowing base.
According to Bloomberg sources familiar with some loan reviews lenders have made for shale firms, the loans the banks are willing to extend to drillers are not only shrinking in amount, but are also becoming more expensive to repay.
Some banks are also concerned that in case of defaults and potential swaps of debt into equity, they may end up owning oil and gas assets which they have no experience in managing, according to Bloomberg.
“A third of the banks doing upstream energy lending will no longer be doing that in the next couple of years,” David Baggett, managing partner at energy business advisory Opportune LLP, told Bloomberg.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.