Debt, equity markets opening up for US producers

OREANDA-NEWS. September 23, 2016. US oil and gas producers — particularly those with lower drilling costs — are again able to tap debt and equity markets, after being shut out through most of the first half of the year.

"The market is fairly wide open today for companies that can drill economically," Stephen Trauber, global head of energy at Citi Investment and corporate banking, said at the 2016 Deloitte oil and gas conference this week.

Funding options are available particularly in the more profitable basins, like the Permian in Texas, and in comparatively newer regions where there is scope for further cost reductions, like the Scoop and Stack in Oklahoma, Trauber said.

Availability of debt and equity point to a return of confidence in the financial sector about the outlook of the US independent upstream industry. Crude prices have recovered to near \\$50/bl and are holding steady, while producers have made sharp cuts to drilling costs — both of which have helped make operations economical for producers. A survey by Deloitte of 251 oil and gas industry executives found that the majority expect US oil and gas companies to step up activity in 2017 as they start to increase their spending.

As oil prices plunged to \\$26/bl in February, access to funds, particularly for smaller- to medium-sized producers, dried up, helping to fuel a surge in bankruptcies. As many as 102 North American oil and gas producers have filed for bankruptcy since the beginning of 2015, involving about \\$67.8bn in cumulative secured and unsecured debt, according to law firm Haynes and Boone. Of that total, 58 producers have filed for protection this year as of 7 September, representing \\$50.4bn in debt.

Beyond availability of funds, producers were also under pressure from their lenders to lower debt because the value of their assets — the bulk of which are oil and gas reserves — declined sharply. If commodity prices are lower, the value of the reserves declines, straining balance sheets for producers that have large volumes of debt. Banks assess the value of the oil and gas reserves in a bi-annual exercise known as the borrowing base redetermination. The spring evaluation carried out around April may have lowered the value of reserves on average by 10-20pc.

While confidence returns, borrowing bases are unlikely to rise anytime soon as oil markets still hold below \\$50/bl. If a company is looking for a "borrowing base increase, you are probably not going to get it," said Robert Horn, senior managing director at GSO Capital Partners.

Borrowing bases may also not rise because many producers have sold off assets to repay debt and shore up their balance sheets, particularly as other sources of funds dried out. This in turn reduced the amount of assets they hold, said Keith Fullenweider, partner at law firm Vinson & Elkins.