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 Every six months, oil and gas producers and their banks negotiate
how much credit they should be given based on the value of their
reserves in the ground.
In previous reviews, banks were willing to offer borrowers some
leeway, encouraged by producers' hedges against falling prices and
their ability to keep cutting costs in step with crude's slide that
began in mid-2014.
This time, with many companies' hedges largely gone and crude prices
used in the reviews as much as 20 percent lower than six months
earlier, banks are getting tough.
Just a few weeks into the current round of talks more than a dozen
companies have had their loans cut by a total of $3.5 billion,
equivalent to a fifth of available credit, according to data
compiled by Reuters. (Graphic:http://tmsnrt.rs/1S9304F]
At that rate, $10 billion more of bank credit will disappear as a
remaining $50 billion or so of credit lines come under scrutiny in
talks that stretch into May.
Companies and bankers contacted by Reuters declined to comment
beyond their public statements due to the sensitive nature of the
talks.
The squeeze puts further pressure on the shale industry to sell
assets, cut jobs and drilling and shrink capital spending. It also
raises the risk that more companies will tip into bankruptcy.
Banks are also under more pressure now from regulators to limit
their energy-related risks as the downturn drags on.
The next credit review in the autumn could take an additional toll
if oil prices, now below $40 a barrel, do not rebound.
"Any company that does not have a widely profitable base at this
current price is going to find it very, very hard," said Christian
Ledoux, senior portfolio manager at South Texas Money Management.
About 36 percent of some 150 energy companies with speculative grade
debt will probably default on their obligations by the end of next
year if oil holds around $35 a barrel, said Tarek Hamid, senior U.S.
credit analyst at JPMorgan Chase & Co.
More than 50 North American oil and gas producers have entered
bankruptcy since early 2015, according to a Reuters review of
regulatory filings and other data.
ANTI-HOARDING
Oil and gas producers rely on revolving credit to finance day-to-day
operations and cuts force them to looks for cash elsewhere.
Clayton Williams Energy Inc <CWEI.N>, for example, which had its
credit line slashed to $100 million from $450 million, borrowed the
difference from Ares Management LP, <ARES.N> an alternative asset
investor that charged triple the rate of the banks.
Fearing that falling crude prices and reserve values could push many
companies into default, companies and bankers have been also
renegotiating financial performance tests and claims on assets while
resetting the borrowing limits.
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Some companies, including Eclipse Resources Corp and California
Resources Corp, have disclosed that banks have agreed to loosen, or
even suspend, minimum financial requirements to give them more
flexibility.
Sometimes banks rewrite clauses that might have allowed lower
classes of lenders to throw borrowers into default and suddenly
trigger repayment requirements and cause bankruptcies, according to
lawyers and analysts tracking the talks.
"Typically bank lenders don't want second- and third-lien lenders to
have that first bite at the apple," said Lindsay Sparks, a partner
at law firm Paul Hastings LLP.
To the alarm of banks, some highly indebted companies, such as Linn
Energy LLC, drew heavily on their credit lines ahead of their
loan talks, lawyers and analysts said.
A spokesman for Linn declined to comment.
"This defensive measure has emerged as a somewhat surprising—and
troubling—trend with broad ramifications for lenders," said FBR & Co
analyst Chad Mabry.
In response some banks have insisted on "anti-hoarding" provisions
that would give them more say over what companies do with cash and
other assets that could go toward repaying the loans.
In February, Phil Rykhoek, chief executive of Denbury Resources Inc
told investors after loan talks with a syndicate of banks, that
lenders agreed to easier financial tests in exchange for accepting
such a provision.
The "anti-hoarding" provision limits how much cash Denbury can hold
before drawing more on its credit line. It was not directed at
Denbury, Rykhoek said, as much as it was a new defensive by banks in
response to seeing other companies draw on their lines to take
lender cash with them as they approached bankruptcy.
"It was very important to them," Rykhoek said.
(Reporting by David Henry in New York and Swetha Gopinath and
Amrutha Gayathri in Bengaluru.; Editing by Carmel Crimmins and
Tomasz Janowski)
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