Every spring and autumn, energy banks reset the lending limits to US oil and gas producers (the borrowing base). A recent survey collected banks' current oil and gas price decks which are used by banks to determine oil and gas producers' borrowing bases. This year the report received the bank price deck responses in March and early April 2022. The current survey of bank price decks enables producers and energy lenders to read the pulse of senior debt markets and the availability of secured credit for oil and gas producers.
This article is part of a series analysing key trends in the US energy sector.(1)
The borrowing base is based on several factors. Each energy lender has its own proprietary algorithm on how to determine its borrowing base. 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.
Price deck and drilling activity increase
In general, the price decks have increased, reflecting the worldwide increase in oil and gas prices this spring. Accordingly, producers expect to see increases in their borrowing bases in Spring 2022. The question is whether the increase will be enough to satisfy producers' needs. Increases in borrowing limits should mean greater access to capital to finance drilling activity this summer among US producers. But just as commodity prices are increasing, so too is the cost of drilling due to constraints on inventory, equipment and qualified personnel.
Figure 1: average oil base case
Figure 2: average gas base case
Increased debt loads
While many public producers are vowing to live within cash flow to avoid increasing their debt loads, there are many other private producers who see growth opportunity in the near term. These producers will look to increase their debt load, taking advantage of the increased price decks, to lever greater returns to shareholders.
With oil and gas prices projected to continue to increase, bank price decks will follow, providing producers with the continued access to greater capital. This higher pricing environment should come as a relief to producers who can plan their activities on a more long-term basis.
For further information on this topic please contact Kim Mai 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.
(1) For the first article in the series, see "ESG disclosures among oil and gas producers".