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The oil and gas industry’s biannual borrowing base determination season has carried a chill during the past two years, but E&P-lender talks aren’t expected to be quite as teeth chattering in spring 2017.
Leading the spring thaw, Eagle Ford E&P WildHorse Resource Development Corp. (NYSE: WRD) said April 5 that its borrowing base will increase by 24% compared to fall 2016. The increase comes despite oil prices remaining mired at $50 per barrel in a slow industry recovery.
Nevertheless, most of the industry expects to see more modest increases—or no change at all—to their borrowing bases, according to Haynes and Boone LLP’s Borrowing Base Redeterminations Survey: Spring 2017.
"We're seeing that many in the industry view the market with more optimism,” said Jeff Nichols, co-chair of the law firm's energy practice group.
The survey, conducted in March, found that 76% of respondents expect borrowing ability to go up or remain flat compared to 59% of respondents in 2016.
Among those anticipating an increase, most said borrowing bases will increase by 10% compared to fall 2016.
Just 3% of respondents see lenders or borrowers opting for bankruptcy or restructuring if faced with borrowing base deficiencies—down sharply from 13% in the last year. About 37% of those surveyed see selling noncore assets as the top remedy for a deficiency.
“The responses reflect a cautious optimism among producers and bankers for the road ahead, but I think everyone is still mindful of the capital destruction plainly visible in the rearview mirror," said Buddy Clark, energy practice co-chair for the firm.
WildHorse’s bank group, comprised of 15 lenders, set WildHorse’s borrowing power at $450 million, up from $362.5 million.
WildHorse management expected the increase in conjunction with a 48% increase in proved reserves to end 2016, said Brian Velie, an analyst at Capital One Securities. In December, the company purchased Clayton Williams Energy Inc.’s (NYSE: CWEI) Giddings asset in East Central Texas for about $400 million.
“The significant increase in proved reserves since the initial borrowing base determination confirms the quality of WRD’s asset base,” said Jay Graham, WildHorse’s chairman and CEO said. The company “has even more flexibility in funding its 2017 development program. We look to continue prudently allocating capital while maintaining a strong balance sheet and solid debt metrics.”
E&Ps such as WildHorse are also on track to spend more in 2017. Haynes and Boone’s survey found that 89% predict that E&P capex budgets will increase in 2017 compared to 2016, with nearly two-thirds of the respondents expecting spending hikes of more than 20%.
WildHorse’s drilling and completion capex is expected to be between $450 million and $600 million in 2017, resulting in a cash flow deficit of about $400 million in 2017, said Jeffrey W. Robertson, an analyst at Barclays.
Velie said he expects the company to exit 2017 with about $353 million liquidity, compared to about $500 million at the end of 2016.
Haynes and Boone’s surveyed 163 people, 45% of whom described themselves as oil and gas lenders, including private-equity firms. About 29% identified as oil and gas producers and potential borrowers.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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