Industry Wary Of Next Round Of Borrowing Base Reductions

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Haynes and Boone recently released its fall Borrowing Base Redeterminations Survey. Since 2015, the firm has conducted the survey twice annually to ask executives at banks, producing companies, private equity sponsors, consultancies, and oilfield service firms about their outlook on upcoming borrowing base redeterminations.

The "borrowing base" is the amount a lender is willing to lend against a company's oil and gas reserves, and is a function, in part, of the estimated future production and costs of the company's proved reserves and the lender's price outlook. It's an important feature of a reserves-based loan (RBL) and is typically redetermined twice a year or when important events occur, such as the sale or purchase of assets.

"Reductions in the borrowing base that occur due to lower commodity prices can create significant financial distress for a company if it has borrowed more than the redetermined amount and must repay the deficiency in a short period of time."

Reductions in the borrowing base that occur due to lower commodity prices can create significant financial distress for a company if it has borrowed more than the redetermined amount and must repay the deficiency in a short period of time. This can be difficult for a company to do because the same lower prices that led to the lower borrowing base are also likely to reduce the cash flows the company needs to repay the outstanding deficiency. Failure to repay the deficiency will place the company in default of its loan obligations and can be the start of a chain of unfortunate events for the borrower. 

In Haynes and Boone's most recent survey, the responses indicate that most respondents are expecting an average 0%-20% reduction in borrowing bases during the fall redeterminations. This is slightly lower than the 20%-30% expected reduction from the Spring survey. This can probably be attributed to relatively stable prices and price outlook over the last several months. I also noted a difference between the borrower and lender outlooks: the most frequent response of the borrower participants was no change in the borrowing base, while the most frequent response of the lenders was a 10% reduction.

One of the other interesting questions the survey asked is related to planned sources of capital in 2021. It shows a wide range of sources and some significant changes from prior surveys. Although the wording of questions has slightly changed, the charts below show the most recent responses compared to those from the Fall 2016 survey. Debt from banks received similar levels of response, but public and private equity have diminished significantly while internal and alternative sources of capital are expected to gain importance.

(Source: Haynes and Boone Borrowing Base Redetermination Survey, Fall 2020) (Source: Haynes and Boone Borrowing Base Redetermination Survey, Fall 2016)

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