U.S. shale oil and gas producers have seen smaller-than-expected cuts to their credit lines, a sign that banks could be relaxing their lending standards to help companies avoid technical defaults.
Companies that hold nearly a third of the energy industry's $100 billion or so in reserve-based loans - borrowed against their oil and gas reserves - have reported a 1.4 percent net drop in credit lines.
Most analysts were expecting at least a 10 percent cut to credit lines after the bi-annual process of revising oil and gas reserve valuations based on current prices.
"I think there is concern ... if (lenders) put too much pressure on the E&Ps, we could see a wave of bankruptcies, and no bank wants to take over operatorship of these assets at $50 oil," Oppenheimer analyst Robert DuBoff said.
Companies such as SM Energy Co and Oasis Petroleum Inc have reported a net reduction of $425 million in credit, according to a Reuters analysis based on public disclosures.
Of the 31 companies that have disclosed information on loan resets so far, banks have cut credit lines of 10 firms by just over $1.15 billion and raised them for six companies by about $725 million.
Shale companies are also pushing lenders to package credit lines in their favor.
For example, while lenders last week cut Oasis Petroleum's credit line, the company is seeking relief by inserting a provision that will allow it to borrow as much as possible under the current facility.
"It's a good example of how bonds and some covenant packages have progressively grown looser over the years," said Anthony Canale, who heads high-yield research at Covenant Review, a research firm focused on debt covenants.
Meanwhile, companies such as Halcon Resources Corp and Midstates Petroleum Co are trying to swap their unsecured debt for new secured loans.
"We are seeing more exotic financing transactions ... notably the swapping of unsecured notes for second-lien and third-lien secured indebtedness," said Jimmy Vallee, a partner at law firm Paul Hastings LLP.
Securing Credit
The relatively few lending cuts also underscore the steps taken by energy companies to keep their credit lines secure.
The decision by many of these firms to snap up hedges in June during a brief price rally has made lending to them far less risky, while a sale of non-core assets and deep cuts to costs have reassured lenders.
Also, after nearly a decade of uninterrupted growth, the energy sector may be short of workout bankers - who deal with troubled loans and negotiate with borrowers - helping energy companies hold on to their loans longer, said Robert Gray, a partner at law firm Mayer Brown LLP.
"They all left, so it's partially a management issue."
Several companies have been able to hold their oil and gas reserves steady because they are mostly completing existing wells rather than drilling new ones.
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