Jefferies: Reserve-based lending redeterminations “surprising gentle”

Analysts with Jefferies Equity Research Americas report banks protected their oil and gas producer customers by giving them more time to improve financial health, but next year’s spring Reserve Based Lending (RBL) redeterminations likely could be tougher unless commodity prices improve.

Banks had been widely expected to trim producers’ borrowing bases by up to 15% this month in the semiannual review of RBLs. Those RBLs were made when oil and gas prices were higher.

“But of the 25 companies we track (which have disclosed fall loan redeterminations) aggregate borrowing base capacity fell only 2% as banks seem to have set aside more capital to protect for loan losses to maintain liquidity for customers,” Jefferies said in an Oct. 19 industry note.

Proved reserve value is recalculated for each producer by bank-approved outside engineers twice a year in a redetermination process. Second-quarter financial results indicated losses and reserve writedowns for many. Third-quarter results have yet to be reported.

“Recent fall redeterminations…have been surprisingly gentle, leading to stable producer liquidity,” Jefferies analyst Jonathan Wolff said.

Wolff said it appears proved, developed, and producing reserves have risen in 2015 for producers amid development budgets largely financed by early-year equity rises.

In addition, recent amended RBL agreements include new or modified restrictive covenants, he said.

“But with annualized prices rolling into weakness, producers will need to be vigilant to maintain stable liquidity,” Wolff added, suggesting that banks also might have shown flexibility because government regulators were on edge, fearing any repeat of the 2008 financial crisis.

Jefferies expects spring 2016 redeterminations could push liquidity lower on anticipated production declines.

“With most oily producers having sharply reduced completion activity in recent weeks, oil production is set to fall, and proved developed producing additions are unlikely to match organic declines,” Wolff said. “Likewise, we believe borrowing-base capacity is likely to fall next spring,” assuming no major change in bank price decks, he said.

Contact Paula Dittrick at

*Paula Dittrick is editor of OGJ’s Unconventional Oil & Gas Report.

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