Many U.S. Shale Firms Renew Loans

A number of U.S. shale oil and gas companies are securing unchanged or even increased credit allotments during their semi-annual loan reviews, defying expectations that banks would slash small firms' credit lines in response to low crude prices.

According to a Reuters review of disclosures made by 19 independent U.S. shale oil and gas companies since Aug. 1, at least 11 have said their borrowing bases have been or will be maintained or increased. In contrast, just five talked about cuts.

It is too early to tell if the whole sector will emerge equally largely unscathed from the reviews. Many more companies from a batch of about 60 U.S. independents typically tracked by investment banks will probably make disclosures after the usual loan reset deadline of Oct. 1.

But outcomes so far suggest an expected pullback by banks may be far less severe than many in the industry have feared.

"I've seen some companies maintaining borrowing bases and some companies even increasing borrowing bases, though other companies are cutting," one energy lawyer in Houston said. "It really is on a case-by-case basis."

The Office of the Comptroller of the Currency has voiced concern about banks' exposure to oil's nearly 60 percent slide given crude prices serve to determine the value of borrowers' assets.

A survey of a broad range of 182 energy industry professionals this month by the law firm Haynes & Boone showed they expected borrowing bases linked to valuations of oil and gas reserves to fall on average by 39 percent.

However, a quarterly survey of 40 energy lenders by the advisory firm Macquarie Tristone showed the average oil price they use to size their loans has edged down only about 5 percent in the last six months, suggesting just a modest pullback in lending.(Graphic: http://link.reuters.com/xec75w)

Bankers also expect crude prices to recover from six-year lows in the months ahead. They see the U.S. benchmark price averaging at $48 per barrel this year and $54 next year and climbing above $61 in 2018 from around $45 now.

A combination of bank lending and private equity financing has allowed many U.S. companies to keep producing crude and adding to a global glut even after funding in public capital markets began drying out in June.

HOLDING UP
Lenders and producers say credit has been holding up even as crude prices tumbled for a number of reasons.

Chief among them: many companies snapped up hedges in June during a brief price rally, making loans to them far less risky

"Many firms were able to hedge in June, so that allowed them to be better positioned coming into redeterminations," said an energy banker in Dallas. "Price decks have largely been maintained ... and most banks are fairly optimistic."

Banks, anticipating an oil market recovery, have also trimmed their price estimates used to size loans, so-called price decks, much less than the drop in crude would suggest.

Finally, by driving down costs companies have helped keep chunks of their reserves, used as collateral for credit, economically recoverable.

Some, such as Gulfport Energy Corp, which operates in Ohio and Louisiana, have also acquired new oil fields during the downturn. Back in February, Gulfport reported its proved reserves had tripled from the previous year and earlier this month the company said The Bank of Nova Scotia had increased its borrowing base to $700 million from $575 million.

Others, such Gastar Exploration Ltd., which operates in Oklahoma, West Virginia and East Texas, credited their hedging for keeping lending bases steady.

Even with cuts, many firms appear to have some financial leeway. Bank of America Merrill Lynch Global Research said this month only a fifth of the 59 oil companies it tracks have used more than half of their borrowing bases.

Private equity funds are also there to plug financing gaps, albeit at a steeper cost than typical loan rates of around 8.5 percent.

"There's a very robust private capital market," said J.P. Hanson, managing director at New York-based investment bank Houlihan Lokey. "For at least a few companies that need a lifeline, there is capital available."

By Terry Wade