Months into one of the worst oil price crashes in history, lenders have tightened the screws on shale producers by wiping away 20% of the credit that has helped fuel the industry's boom.
Twice every year, oil and gas producers negotiate how much credit they should get from banks based on the value of their reserves in the ground. Those loans, called RBLs, are the industry's key financing tool.
So far in the spring season of redeterminations, the total borrowing base for three dozen publicly listed North American oil companies has been slashed by $7.5 billion, according to a Reuters analysis.
Oil prices are trading around $40, down 35% this year due to coronavirus-related demand worries and a Saudi-Russia pricing war, and many oil companies cannot break even at these levels.
"Prices are just way down and so the banks are having to reduce the credit line for that," said Kraig Grahmann, partner at Texas-based law firm Haynes and Boone.
"The other issue is that banks themselves are trying to do what they can to reduce their exposure to the oil and gas lending space."
Oil companies run their day-to-day operations using credit and many, including Antero Resources Corp. and Callon Petroleum Co., have already drawn large amounts out of the RBL. Some others drew down heavily in the weeks after prices crashed, saying they would need the cash to survive.
In response, banks have raised interest rates and are adding 'anti-hoarding' clauses to many facilities to restrict how much cash a company can keep on hand and are pushing them to use the excess cash to repay debt.
"The top five banks engaged in oil and gas lending are estimated to have at least $40 billion-$50 billion in commitments to RBLs," said David Morris, managing director in Dacarba LLC's restructuring group.
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