High Stakes for Independents | Russell T. Rudy Energy LLC
In a recent blog (https://rudyenergy.com/risk-to-independents-exaggerated/ ) I cited an article in “World Oil”, which, based on analysis by consulting group Wood Mackenzie, contended that domestic operators were largely immune to the impact of fall reserve revaluations by lenders. Now, “Rigzone” reports the investment firm Raymond James (RayJa) has reached the opposite conclusion.
RayJa contends that upstream operators dodged a bullet during the Spring redeterminations of the value of proved but undeveloped reserves. At the time small to mid-cap oil and gas companies saw the value of reserves downgraded, on average, 12%. These valuations are the basis for Reserve Based Lending agreements and determine how much credit banks are willing to extend. At that time many lenders were optimistic that prices would rebound quickly. Also, some operators had hedge contracts in place that insured revenue at relatively favorable prices.
Now however, prices look like they will be lower for longer than originally anticipated. This, in and of itself, not only affects the value, but also the volume, of economic reserves. Further, the downturn in drilling activity has left operators unable to prove up additional reserves. As domestic production rates drop, cash strapped companies do not have the capital to invest in new development projects. This, in conjunction with the expiration of favorable hedge contracts, makes the future bleak for some.
RayJa sees credit lines for the small and mid-cap oil and gas companies being reduced 15-20% overall. However, some industry observers anticipate reductions of 30%. Either way, the investment firm thinks that this fall will not be the last of borrowing base reductions. They predict that this, in turn, will lead to mergers and acquisitions, asset sales, and even some corporate restructurings.
To read the article in its entirety, please go to http://www.rigzone.com/news/article.asp?hpf=1&a_id=141137&utm .
