As banks make their biggest cuts yet to their loans to the energy sector, the U.S. shale drillers that have upended global energy markets are finally feeling a credit squeeze nearly two years into an epic oil rout.
Based on the value of their reserves in the ground oil and gas producers and their banks negotiate how much credit they should be given every six months.
Encouraged by producers' hedges against falling prices and their ability to keep cutting costs in step with crude's slide that began in mid-2014 banks were willing to offer borrowers some leeway in previous reviews.
Banks are expectedly getting tough on granting loans to the sector as crude prices used in the reviews as much as 20 percent lower than six months earlier and with many companies' hedges largely gone.
According to data compiled by Reuters more than a dozen companies have had their loans cut by a total of $3.5 billion, equivalent to a fifth of available credit just a few weeks into the current round of talks between banks and shale companies.
As a remaining $50 billion or so of credit lines come under scrutiny in talks that stretch into May, at the present rate industry experts predict that $10 billion more of bank credit will disappear.
Selling of their assets, cutting jobs and drilling and shrinking of capital spending are some of the pressures that are being felt by the shale companies due to the credit squeeze.
As the down turn lingers on, there is further pressure on the banks now from regulators to limit their energy-related risks.
If oil prices, now below $40 a barrel, do not rebound an additional toll on credit is expected by the time of the next credit review scheduled for the autumn.
"Any company that does not have a widely profitable base at this current price is going to find it very, very hard," said Christian Ledoux, senior portfolio manager at South Texas Money Management.
Tarek Hamid, senior U.S. credit analyst at JPMorgan Chase & Co said that if oil holds around $35 a barrel, there would probably be a default on their obligations by the end of next year by about 36 percent of some 150 energy companies with speculative grade debt.
According to a Reuters review of regulatory filings and other data, more than 50 North American oil and gas producers have entered bankruptcy since early 2015.
Credit cuts force Oil and gas producers to look for cash elsewhere as most of their day-to-day operations rely on revolving credit for financing.
For example, Clayton Williams Energy Inc was charged triple the rate of the banks as the company had to borrow money from Ares Management LP, an alternative asset investor, as banks slashed their lending to the company to $100 million from $450 million.
Companies and bankers have been also renegotiating financial performance tests and claims on assets while resetting the borrowing limits as there is a fear that falling crude prices and reserve values could push many companies into default.
Banks have agreed to loosen, or even suspend, minimum financial requirements to give them more flexibility, some companies, including Eclipse Resources Corp and California Resources Corp, have disclosed.
According to lawyers and analysts tracking the talks sometimes banks rewrite clauses that might have allowed lower classes of lenders to throw borrowers into default and suddenly trigger repayment requirements and cause bankruptcies.
"Typically bank lenders don't want second- and third-lien lenders to have that first bite at the apple," said Lindsay Sparks, a partner at law firm Paul Hastings LLP.
Lawyers and analysts said that some of the indebted companies like Linn Energy LLC, drew heavily on their credit lines ahead of their loan talks which has raised an alarm for banks.
"This defensive measure has emerged as a somewhat surprising—and troubling—trend with broad ramifications for lenders," said FBR & Co analyst Chad Mabry.
(Source:www.reuters.com)
Based on the value of their reserves in the ground oil and gas producers and their banks negotiate how much credit they should be given every six months.
Encouraged by producers' hedges against falling prices and their ability to keep cutting costs in step with crude's slide that began in mid-2014 banks were willing to offer borrowers some leeway in previous reviews.
Banks are expectedly getting tough on granting loans to the sector as crude prices used in the reviews as much as 20 percent lower than six months earlier and with many companies' hedges largely gone.
According to data compiled by Reuters more than a dozen companies have had their loans cut by a total of $3.5 billion, equivalent to a fifth of available credit just a few weeks into the current round of talks between banks and shale companies.
As a remaining $50 billion or so of credit lines come under scrutiny in talks that stretch into May, at the present rate industry experts predict that $10 billion more of bank credit will disappear.
Selling of their assets, cutting jobs and drilling and shrinking of capital spending are some of the pressures that are being felt by the shale companies due to the credit squeeze.
As the down turn lingers on, there is further pressure on the banks now from regulators to limit their energy-related risks.
If oil prices, now below $40 a barrel, do not rebound an additional toll on credit is expected by the time of the next credit review scheduled for the autumn.
"Any company that does not have a widely profitable base at this current price is going to find it very, very hard," said Christian Ledoux, senior portfolio manager at South Texas Money Management.
Tarek Hamid, senior U.S. credit analyst at JPMorgan Chase & Co said that if oil holds around $35 a barrel, there would probably be a default on their obligations by the end of next year by about 36 percent of some 150 energy companies with speculative grade debt.
According to a Reuters review of regulatory filings and other data, more than 50 North American oil and gas producers have entered bankruptcy since early 2015.
Credit cuts force Oil and gas producers to look for cash elsewhere as most of their day-to-day operations rely on revolving credit for financing.
For example, Clayton Williams Energy Inc was charged triple the rate of the banks as the company had to borrow money from Ares Management LP, an alternative asset investor, as banks slashed their lending to the company to $100 million from $450 million.
Companies and bankers have been also renegotiating financial performance tests and claims on assets while resetting the borrowing limits as there is a fear that falling crude prices and reserve values could push many companies into default.
Banks have agreed to loosen, or even suspend, minimum financial requirements to give them more flexibility, some companies, including Eclipse Resources Corp and California Resources Corp, have disclosed.
According to lawyers and analysts tracking the talks sometimes banks rewrite clauses that might have allowed lower classes of lenders to throw borrowers into default and suddenly trigger repayment requirements and cause bankruptcies.
"Typically bank lenders don't want second- and third-lien lenders to have that first bite at the apple," said Lindsay Sparks, a partner at law firm Paul Hastings LLP.
Lawyers and analysts said that some of the indebted companies like Linn Energy LLC, drew heavily on their credit lines ahead of their loan talks which has raised an alarm for banks.
"This defensive measure has emerged as a somewhat surprising—and troubling—trend with broad ramifications for lenders," said FBR & Co analyst Chad Mabry.
(Source:www.reuters.com)