Kraig Grahmann December 5 2022 Borrowing base redeterminations survey: Autumn 2022 Haynes and Boone LLP | Energy & Natural Resources - USA Kraig Grahmann Energy & Natural Resources IntroductionBorrowing baseKey takeawaysCommentIntroductionA recent survey collected energy finance professionals' viewpoints on expectations for the Autumn 2022 borrowing base redetermination season.(1) The survey was conducted in September 2022 and the primary objective was to provide a forward-looking and clear idea of what lenders, borrowers (oil and gas producers) and others are experiencing regarding borrowing base redeterminations in light of price uncertainty in the commodity markets.Borrowing baseAn upstream oil and gas company's borrowing base is based on several factors. Each energy lender has its own proprietary method for how to determine borrowing bases of its oil and gas company borrowers. Future expectations of commodity prices (the price deck) over the life of the loan are not the sole determiner. However, they are a principal variable in a bank's calculations. Therefore, predictions regarding future borrowing base redeterminations are heavily influenced by future commodity price expectations.Key takeawaysOil and gas pricesStrong oil and gas prices are not directly resulting in strong borrowing base increases. Despite oil and natural gas prices reaching heights not seen since 2014 (in the case of oil) and 2008 (in the case of natural gas), respondents are not expecting robust borrowing base increases in Autumn 2022. A meaningful percentage of respondents are predicting that borrowing bases will stay flat or even decrease slightly.Hedging percentagesThe survey shows lower hedging percentages, a trend that started in Spring 2022. Producers appear to be assuming that there is more price upside to come and do not want to risk leaving money on the table.Capital sourcesThe capital sources that show the biggest increase in the Autumn 2022 survey when compared with the Spring 2022 survey are monetisation transactions and debt from alternative capital providers, a trend that is not normally seen during the stronger price environment that currently exists. This perhaps is the result of the more muted interest from banks, debt capital markets and equity capital markets.EBITDA levelsA producer raising capital in the reserve-based lending market will need to keep its earnings before interest, taxes, depreciation, amortisation and exploration expense (EBITDAX) levels in check. Respondents see an EBITDAX multiple of less than two (and ideally less than one-and-a-half) as a necessity to successfully attract RBL capital.CommentThe Autumn 2022 borrowing base redeterminations survey produced surprising results in light of current energy market conditions. Though the underlying oil and gas commodity prices that have been seen in 2022 make a rational case for more investment in the upstream oil and gas space, it appears that the distress in the space from 2019 – 2021 have made energy lenders and financiers intolerant of almost any risk.For further information on this topic please contact Kraig Grahmann at Haynes and Boone by telephone (+1 713 547 2021) or email ([email protected]). The Haynes and Boone website can be accessed at www.haynesboone.com.Endnotes(1) To read the full results of the survey, see "Haynes Boone Borrowing Base Redeterminations Survey: Fall 2022".