Expectations have been that banks would cut back on lending to oil firms amid low crude prices. It doesn’t seem like this is the case as reported by Reuters after reviewing disclosures by 19 shale oil and gas companies. Only five firms reported cuts while 11 said their borrowing capability remained the same or increased.
Whether this is symptomatic for the whole sector is too early to tell. A clearer picture should emerge after the loan reset deadline on the 1st of October. Many more companies will be reporting then. But the extent of banks pulling seems so far to be less severe than anticipated.
There does not seem to be a general trend as one energy lawyer was quoted saying “I’ve seen some companies maintaining borrowing bases and some companies even increasing borrowing bases though other companies are cutting.”
There is a concern from the Office of the Comptroller of the Currency about the exposure of banks since crude prices are used to value borrower assets. But while industry professionals expected reserves to drop by 39 percent, a quarterly survey by advisory firm Macquarie Tristone found that the average oil price used by bankers to size their loans has only dropped by 5 percent.
This bank lending combined with strong private equity financing allows oil producers to stay in business and adds to the global oil glut. Though private equity comes with a higher cost than bank financing, which usually hovers around 8.5 percent.
There are various reasons why credit continues to be available. The main reason is hedging, as many companies used the brief rally in June to hedge their positions. Gastar Exploration Ltd. is one of the companies that has managed to keep its lending base stable. This makes the loans far less risky. Banks are also factoring in a market recovery as the price decks they use reflect higher price than what oil is currently trading. Some companies have also acquired new fields during the downturn. This increases their proven reserves which in turn increases their borrowing base. Once such company is Gulfport Energy Corp, which managed to increase their borrowing base from $575 million to $700 million after tripling their reserves.
Driving down costs is also helping as lower costs keep larger parts of a company’s reserves economically recoverable which allows more collateral for credit.
Furthermore, even with cuts most companies have wiggle room as the majority has not used more than half of their borrowing base.