EDITOR – OGFJ
Improved outlook as redeterminations
WHEN ASKED to make predictions about
the financial state of the oil and gas market by
Haynes and Boone LLP, a majority of those
surveyed—163 participants representing a
broad cross-section of the industry including
executives at oil and gas producers, oilfield
services companies, banks, and private equity
firms—were optimistic, even if some only
“We’re seeing that many in the industry view the market with
more optimism,” said Haynes and Boone Houston Partner Jeff
Nichols, co-chair of the firm’s Energy Practice Group, in early April
after the spring 2017 survey results were released.
When asked specifically about what the likely outcome of the
traditional producer/lender meeting to assess borrowing capacity
would be, respondents said they expect that 76% of producers will
see borrowing bases increase slightly or remain unchanged compared to their fall 2016 borrowing bases. When the firm conducted
the survey in the fall of 2016, respondents expected only 59% of
producers to see borrowing bases increase or remain
In another upward trend, almost all of the respondents (89%)
expect E&P companies to increase capital expenditure budgets in
2017. Last year, nearly two-thirds of those surveyed expected
substantial budget increases of 20% or greater.
But let’s get back to those borrowing base redeterminations.
Among those respondents predicting that borrowers will see an
increase, most expect the increase to be about 10% above fall 2016
I reached out to Haynes and Boone for an update.
“Borrowing base redetermination season is still ongoing, but
most companies who have announced had outcomes that are
consistent with our survey predictions. Oasis Petroleum, WildHorse
Resource Development, Concho Resources, Carrizo Oil & Gas, and
Swift Energy all recently announced modest—and in some cases,
significant—increases,” said Kraig Grahmann, partner in the Energy
Practice Group at Haynes and Boone, and head of the firm’s Energy
Finance Practice Group.
“There have been some borrowing base decreases, but they are
not as widespread as they were in 2015 and 2016,” he continued.
Let’s look quickly at some of the increases. I don’t know what
the threshold is between modest and significant, but Oasis Petroleum’s borrowing base is up 39% from $1.15 billion to $1.60 billion.
WildHorse Resource’s 15 lender bank group increased the company’s
borrowing base 24% from $363 million to $450 million. Concho is
up 7% from $2.8 billion to $3.0 billion. Carrizo’s banking syndicate,
led by Wells Fargo as administrative agent, increased the borrowing
base from $600 million to $900 million. Carrizo, however, elected
to take a lower commitment of $800 million. Swift Energy was
oversubscribed on its amended and restated senior secured credit
facility, and its borrowing base increased by 32% to $330 million.
JP Morgan led the facility and was joined by a syndicate of eleven
banks, including six new lenders.
I can go on. Eclipse’s borrowing base increased 40% from $125
million to $175 million. Vine Resources’ borrowing power is up
40% from $250 million to $350 million, and Jagged Peak Energy is
up 13% from $160 million to $180 million. WPX Energy’s borrowing
base increased to $1.2 billion from $1.025 billion, and Halcón Resources received commitments for a $650 million borrowing base—
an increase of $50 million.
Will the increase in borrowing capacity result in companies
significantly increasing debt loads? The short answer is: probably
not, said Grahmann.
“E&P companies are spending more on drilling and buying more
properties than they did in the downturn, but the significant capital
destruction that occurred in 2015-2016 as a result of the commodity
price collapse is something that producers—and their capital
providers—are still mindful of. Loans are being made and equity
and bonds are being issued, but everyone is still very focused on
not being over-levered. Additionally, a number of reserve-based
credit facilities have recently included an “elected commitment”
concept, a mechanism which allows the lenders to commit to
making their share of loans to the borrower at an amount below
the borrowing base.”
We’re also unlikely to see suspensions of redeterminations such
as those seen by Chesapeake, Grahmann continued.
“The Chesapeake borrowing base holiday that was agreed to in
April 2016 and allowed Chesapeake to skip its fall 2016 redetermi-
nation is a unique concept not generally used in the reserve-based
lending world,” he said, noting that suspensions “were used in a
handful of other distressed credit facilities at the outset of the
downturn, but the updated regulatory guidelines published by the
OCC in March 2016 very quickly limited banks’ ability to ‘kick the
can (barrel) down the road.’”
Exceptions, though, include some reserved-based credit facilities
for companies exiting bankruptcy, he explained. Some “include
some form of a borrowing base redetermination holiday (usually
12 to 18 months)” that gives unsecured creditors converting debt
to equity “some assurance that the company will have time after
bankruptcy emergence to eliminate any remaining non-conforming
portion of its borrowing base and otherwise achieve a proper bal-
ance of the reserves and the borrowing base debt (through asset
sales, development drilling, or hoped-for oil price increases, etc.)
without having to worry about the lenders creating another bor-
rowing base deficiency.”
Based on the redeterminations mentioned in this writing,
spring redetermination season is off to an even better start than