As producers’ oil and gas hedges at 2008 highs continue to expire, fall credit-facility-redetermination season may make yet more producers upside down—particularly gas-weighted producers whose forecasted cash flow is even lower now than it was this spring.

What are E&P and upstream-finance leaders’ forecasts for the upcoming borrowing-base reviews? Oil and Gas Investor surveyed several. Following are some of the responses.

A mezzanine energy financier: “The forecast: Ugly. (There are) strong headwinds with a high probability of bankruptcies.”

An executive with a privately held E&P: “Those who have positive long-term outlooks will be okay; those who do not will have problems. In any case, the banks will continue to get better terms for themselves in the process. The banks will have more time to focus on redeterminations this time around as there are not as many distractions—(and) that would be a negative for their clients.”

There may be some negotiation, yet. “If the banks cause defaults, they are then stuck with owning/selling assets in a down market, so that probably means working with clients rather than calling a default, if there is a chance the client can make it until natural gas prices recover.”

Another private E&P executive: “I believe that lenders are generally becoming cautiously optimistic about oil and gas companies’ financial positions. Working with borrowers as they sold assets, reduced capital budgets and accessed the capital markets during the spring seemed to work for the banks, and I believe that this likely will continue in the fall. Looking into 2010, we are seeing early signs of banks shifting focus from capital preservation to extension of capital to generate returns.”

A commercial energy lender: In the spring of 2009, lenders were exercising great caution as opposed to trying to accommodate producers...During the fall 2009 redetermination cycle, bankers will scrutinize projected cash flows in a very intense fashion. Since much of the hedged production will have been produced and the remaining reserves will be subject to bank price decks, it would appear that some borrowing bases are susceptible to reductions.

“Also, since companies limited their development budgets, reserve replacement will be negligible, if not negative. These phenomena, combined with lower product prices, will most likely contribute to lower borrowing bases.”

A private E&P CFO: “Fall redeterminations will be about cash flow, not about reserves. It’s not about reserves right now for most E&Ps; it’s about cash flow.”

A private E&P president: “We will see more companies put in a position of needing to reduce their debt to be compliant. It was our experience in the spring that the banks were not as conservative on their price decks as they might have been. I doubt we will see any recovery in gas prices, so particularly for gas-rich companies, there may be some adjustments on the horizon.”

An E&P executive: “I don’t think (the banks) will be as accommodating this fall. There were a number of companies whose borrowing base this spring was set at whatever they owed—with the message to the company, direct or indirect, ‘Get something done by fall or it will get uglier.’ That said, banks absolutely hate to pull the plug on someone: They talk tough but they will do almost anything to avoid a foreclosure or other messy situation. So they (will let) things go a while longer and hope that prices bail them out.”

The sharks are circling the forced-asset-divesture prizes.

One asset evaluator says, “With storage levels as high as they are, it will take a major catastrophe to increase ‘net’ gas prices. It will be interesting to see if some of the highly leveraged, predominantly gas companies will be forced to sell assets.”

One of the E&P executive adds, “We would like to see some acquisition opportunities arise as a result of asset rationalization—or, at least, see higher-quality assets on the market. A number of companies have significant hedge positions rolling off and, often, the bank is the counterparty so they are just trading dollars unless assets move.”

Access to equity markets re-emerged in May. For those with dry powder, access to assets may re-emerge this fall.

Note: For more comments, see the round-up report “Survey: Fall Redeterminations May Be ‘Ugly’” at

--Nissa Darbonne (, E-Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, Today,,,