Borrowing base reductions will strain liquidity

A just-released report by Moody’s Investors Service explores the impact of borrowing base reductions on E&P companies’ liquidity. Among the highlights:

  • Low oil and gas prices will weaken the liquidity of many lower-rated North American exploration and production companies after creditors redetermine their reserve-based lending (RBL) facilities’ borrowing bases in the current quarter.

  • Reduced borrowing bases will force some companies to seek to enhance liquidity either by finding alternate sources, improving margins, or limiting capital spending.

  • Moody’s anticipates that banks will lower their fall 2015 oil price decks by some 15%–25% from their spring 2015 assumptions, significantly reducing RBL borrowing bases for some E&P companies.

  • Thirty-eight percent (38%) of the Ba and B-rated E&Ps surveyed expect their borrowing bases to decline in the fall, while only 17% expect an increase.

  • Hedges on oil and natural gas prices, which insulated many producers from declining oil prices in the second half of 2014 and in 2015, will provide less benefit in 2016.

  • More than two-thirds of the Ba- and B-rated E&P companies have at least some crude oil hedges in place today, covering 45% of 2016 oil production with an average price near $70/bbl.

  • Most E&P companies will keep their capital spending flat or reduce it further to preserve liquidity and stay within their cash flow.

  • E&P companies reduced capital spending by around 20% sequentially in the first and second quarters of 2015.

  • Complying with financial covenants will remain a challenge for several E&P companies.

  • Many companies amended their credit agreements in 2015 to relax existing financial covenants, or to substitute different test metrics for an interim period.

 



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