American Oil and Gas Reporter - October 2024 - 64

SpecialReport: Financial Perspectives
there is notable deviation in banks' price
projections, " the firm comments. " Though
most banks anticipate a general decline
in oil and gas prices beyond 2025, several
banks still project growth in oil and gas
prices into the 2030s. This optimism may
be fueled by major oil and gas companies'
recent reemphasis on investing in hydrocarbon
exploration and production in
their short- and long-term strategic plans. "
Industry Resilience
Thanks to capital discipline, the upstream
industry has gotten better at weathering
downturns, suggests Spencer Cutter,
senior credit analyst with research and
consulting firm Bloomberg Intelligence.
" During the last down cycle, borrowing
base determinations were not so bad because
no one was on the edge of liquidity, "
he says. " That is different from the previous
cycle in 2015-16, when a few companies
did hit the wall. But banks were
just protecting themselves. "
RBL is " as much of an art as it is a
science, " Spencer considers. " It's not
pure math. There is a lot of wiggle room
to cut, hold or expand the borrowing
base. I was in investment banking for
many years, and we would lend to get
our foot in the door for mergers and acquisitions,
bond placements and underwriting.
In many cases, the lender's
actual commitment is less than the borrowing
base, and they can evaluate that
commitment with a broader relationship
in mind. "
That relationship may include hedging
if the bank has a large commodity trading
group, Cutter adds. " If there is more to
be made on the borrowing base, the RBL
itself could be attractive to regional banks.
But the bigger banks make the revolver
available because they want to be the
book runner or leader on an M&A transaction, "
he summarizes.
The process for determining borrowing
bases resembles the one for calculating
PV-10 in the sense that it looks at expected
free cash flow from the reserves after accounting
for drilling costs, production, realized
commodity prices and other factors,
Spencer says. However, the details for evaluating
those factors differ. As an example,
borrowing base calculations use forwardlooking
price curves rather than backward
ones. Spencer adds that borrowing bases
tend to be much smaller than PV-10, as
they focus on proved developed reserves
and give far less weight to undeveloped,
probable and possible reserves.
Vincent G. Piazza, a senior oil and
gas equity analyst for Bloomberg Intelligence,
comments that producers' balance
sheets have been clean. " Net debt to
EBITDA has been close to 1x, a level indicating
a healthy industry that can throw
off some cash, " he says. " There has not
been a need to tap equity markets aside
from M&A. We have seen that for consolidations,
but deals are often constructed
with cash and stock. "
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American Oil and Gas Reporter - October 2024

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