These Energy Companies Are Most At Risk From The “Spring Redetermination”

In late September, during the peak of fall borrowing base redetermination , many oil and gas companies got their first glimpse of just how bad their liquidity would get when as a result of collapsing commodity prices, the value of their collateral crashed when PV-10s plunged by up to 80% Y/Y as of December 2015…

… and resulted in plunging access to secured liquidity as borrowings bases were eviscerated as much as 38% (for those unfamiliar with the basics of the semiannual redetermination process, the WSJ has a handy and brief 101).

Incidentally, it would have been far worse if the Dallas Fed and OCC had not stepped in and told lender banks to take it as easy on the debtors as possible, and in some cases, even suspend market-based calculations for price decks. The reason for this kid glove treatment was that many banks were unprepared to reserve and write down the value of their energy loans down to fair values as of the fall.

Now, six months later, neither the OCC nor the (Dallas) Fed will be quite as generous and demand that banks act as a benevolent cartel. In fact, from what we have heard, it will be quite the opposite which explains the urgent scramble by many banks to force their debtor clients to issue equity and use the proceeds to repay secured loans.

As such, the imminent spring redetermination may prove to be just the catalyst to push the recently latent energy crisis to the next level.

So which companies are most at risk of a suddenly air pocket in liquidity? For the answer we go to a recent Bloomberg Intelligence slide deck prepared precisely for the purpose of showcasing the companies with maxed out credit lines. These are as follows:

However, while these companies certainly have pulled the short stick, ironically they may not be the first to go: after all, at least they had the foresight of using up their entire available revolvers (and in the odd case of PostRock, more than 100% of it) – it doesn’t matter if now the banks decide to collapse their borrowing base – the funds have already been wired and good luck getting a refund.

No, the companies most at risk may actually be those with that currently have some of the most highly utilized borrowing bases, ranging anywhere from 62% for Contango to 94% for Vanguard. It is these companies that will suddenly find themselves with zero incremental sources of liquidity as the banks proceed to whack anywhere from 30 to 50% of their borrowing base, leaving them scrambling to preserve liquidity and ultimately leading to bankruptcy court, in no small part under the pressure of secured and soon to be DIP lenders (and in most cases, the post reorg equity) who will demand the least amount of Enterprise Value be wiped out in the months before bankruptcy. Here are the names.

We would be most worried about the near-term viability of the companies shown above: in our humble opinion these are the companies most at risk from the upcoming spring redetermination period.

As for the companies shown below, we would not be quite as worried about them, although we are confident that in a few weeks time these “largest borrowing bases” will be substantially smaller.

Finally, courtesy of Haynes and Boone, here is a less impartial perspective thanks to a poll of banks, PE firms, and oil service companies who were asked to share their thoughts on the upcoming spring redetermination. Among the key findings:

Overall respondents expect 79% of the borrowers to see a decrease in their borrowing base in spring 2016
Overall respondents, on average, expect to see borrowing bases to decrease by 38% compared to what they were in fall 2015
As to the most likely path to be taken by lenders and borrowers who face a borrowing base deficiency this spring: 36% of respondents said the would negotiate an amendment or extension with the lender; 31% said they would sell non-core assets; 15% said they would seek capital from a hedge fund or private equity fund; 4% said sell the company; 13% said restructure or declare bankruptcy

Haynes and Boone slideshow: