“Hope is not a ‘strategy.’ Your banker does not want to hear that everything is going to be fine once natural gas prices improve,” says Carl Stutzman, senior vice president and manager of Union Bank’s petroleum commercial-lending group, in the recent webinar Forecasts For The Fallout From Fall Bank Redeterminations.
“Have a realistic game plan with actions that are within (your) control,” he says of working with lenders year-round and during this fall’s bi-annual borrowing-base redetermination season.
“Hope is probably also not a ‘confirmable plan’” in bankruptcy court, adds Trey Wood, a Houston-based partner with law firm Bracewell & Guiliani LLP and specializing in business reorganizations and Chapter 7, 11 and 13 bankruptcy cases. “At the end of the day, what the plan has to be is ‘fair and equitable.’” If unwilling to negotiate, “you will get into a very expensive fight…to declare what is fair and equitable.”
Banks themselves have undergone tremendous transition this past year, and many continue to work to find their footing. “The nice person who used to be your commercial banker is now a sort of neurotic mess,” Stutzman says.
There are challenges even within E&P companies’ lender groups, he adds. “We have probably spent as much time dealing with dysfunctional bank groups (this past year) where we are lead agent (on a facility) than with the client…(And, within the lender group) sometimes we are forced to solve to the lowest common denominator as the agent bank is unable to take out an uncooperative lender.”
His forecast for the upcoming redetermination season? “We expect this to be a more challenging period…We’re all worried about gas prices…We’ve all pretty much given up at this point as to when that (gas-price improvement) is going to happen.”
Wood says prospective oil and gas asset buyers see distressed E&Ps file bankruptcy in various federal court districts. “The reason often is they’re looking for a friendly judge.”
Potential “debtor in possession” financing can come from DIP lenders, second/junior lien-holders, existing equity, new investors (e.g. loan to own), existing first-lien lenders (a defensive DIP strategy) and vendor financing.
“Vendors aren’t in the business of lending money, but they will do it often to protect (the debt already owed)…but they will want a primary lien on existing program wells,” Wood says. Vendor financing is also expensive: It’s at 100% cost, plus a risk premium of as much as 25%, plus interest and cost.
Distressed E&Ps, and their lenders, also face a lower-priced asset market than a year ago, Stutzman notes. “It’s a soft A&D market out there.”
Chris Simon, managing director, investment banking, and head of asset A&D for Raymond James & Associates Inc., says, “We are well below the prior year’s (market prices)…in almost all cases.”
Prices for gas-weighted assets have plummeted most. Here’s the current environment, Simon says: Buyers are using strip prices, PDP net present value discount rates have risen to above 10% and as high as 15%, many gas PUDs are uneconomic at today’s prices but look better in next year’s budget, valuation metrics are showing signs of improvement, oil-weighted assets are realizing attractive metrics in line with 2004-07 metrics, and sellers are considering selling their oil-weighted assets.
“(Buyers are) having to stretch a bit beyond the PDP for the nonproducing reserves,” he adds.
Most buying and selling this year has been of oily Permian Basin properties. “By far the largest volume of deals has been in the Permian…As for shale, the greatest activity has been (the joint venture)—foreign buyers interested in learning the technology and taking it back to their country and acreage programs.”
Will seemingly healthy E&Ps form a line at bankruptcy courts this fall? Stutzman says, “I have been pleasantly surprised by how proactive E&P companies have been, including in accessing the (public) debt and equity markets (when open). For the most part, our public E&P companies look healthy.” Bankruptcy filings may more likely come from private E&Ps that may have already been struggling, he says.
Simon says, “Some gas assets will be forced onto the market due to distressed situations.”
Wood concludes, “Most of the lenders are going to work through this process…You are going to see more out-of-court restructurings than bankruptcy filings.”
Stutzman says of the upcoming borrowing-base redetermination season, “Be completely open and honest, even if it’s bad news.” Also:
-- The restructuring plan must address both asset value and cash-flow coverage.
-- Take bold steps quickly. Plan on lengthy meetings and information requests from lenders. Expect a thorough review of the loan/collateral documentation. Anticipate the banks’ desire to reduce “hold” levels. And, be prepared to have the deal repriced and to pay fees for amendments.
“Banks really do want to work with their borrowers to solve problems,” Stutzman says. “…Bankruptcies and foreclosures really destroy value.”
For the presenters’ remarks, and to download their slides, click to Forecasts For The Fallout From Fall Bank Redeterminations now available on demand.
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