Haynes Boone: Banks’ New Price Assumptions May Affect Producers’ Lines of Credit

April 10, 2020April 20th, 2020
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Law firm Haynes Boone surveyed banks before and after the price crash, and the surveys showed a severe drop in price assumptions in the calculations banks use to calculate loan offerings to producers.

Law firm Haynes Boone surveyed banks before and after the price crash, and the surveys showed a severe drop in price assumptions in the calculations banks use to calculate loan offerings to producers.

The next few years of our industry are widely expected to much different now than they were before prices fell in March. Revised price assumptions are going into banks’ models as they calculate the value of E&Ps reserves and the details of loans.

Haynes Boone summarized the effect of price assumptions on borrowing base very well. In their summary of findings (available here) Haynes Boone noted “the borrowing base, which is the amount of credit a lender is willing to extend to an oil and gas producer, is based on a number of factors. … Future expectations of commodity prices (the price deck) over the life of the loan is not the sole determiner. However, it is a principal variable in a bank’s [borrowing-base] calculations. Therefore, predictions regarding future borrowing base redeterminations are heavily influenced by future commodity price expectations.”

The chart below is taken from their surveys, which we highly recommend every producer reads. In the chart, the green lines show the “Pre-Crash” case in their prior survey. At that time, banks assumed a flat curve, with the mean expectation in the upper $40s through 2025. The dotted and dashed lines so the minimum and maximum, respectively, from their respondents.

In red are the Post-Crash survey responses. The mean of the responses is now much lower, and looks similar to a recent WTI forward curve. But it is a severe departure from the Pre-Crash figures. For instance, the maximum case now is still lower than the mean case from before. It’s not until 2024+ when the highest prices in the newer survey are near the mean of the pre-crash levels.

Haynes Boone noted the 15.6% drop in the average oil price from last Fall’s Energy Bank Price Deck Survey means that producers could see a similar percentage drop in their bank line of credit. A company’s ratio of production hedged versus assets or production mix may be mitigating factors, possibly providing some support.

For more, including the survey results for natural gas prices, check out the Haynes Boone website at https://www.haynesboone.com/publications/energy-bankruptcy-monitors-and-surveys.
AEGIS notes it is yet to be determined how hedging requirements may change in light of lower oil and gas price decks used by banks. But we do note that with potentially less access to debt, producers should pay close attention to their hedging policies. Protection against further price declines may have just become much more important in managing liquidity.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com

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