Energy Lenders' Price Decks

Energy lenders’ second-quarter 2010 outlook for oil prices indicates that banks are adjusting their forecasts as prices continue to fluctuate, according to a new survey of 38 commercial-capital providers.

Front-year oil prices are now above the $50-per-barrel threshold, as average price expectations rose to $59.60 this quarter, up from $56.41 in March 2010.

Meanwhile, the front-month gas-price forecast fell to $4.30 per million Btu, a significant decrease from $4.52.

The results are according to global energy investment-banker and M&A advisor Macquarie Tristone’s quarterly “Energy Lender Price Survey” of regional, national and international reserve-based lenders.

The lenders’ five-year trend shows an increasing forward price deck for both oil and gas, with average 2014 forecasts climbing to $65.60 for oil and $5.65 for gas.

“Modest escalation of both oil and gas prices after 2014 is common, but prices are capped at an average of $63.82 and $5.61, respectively,” the firm reports.

The average discount rate used by participating banks is 9%, unchanged from last quarter’s figure. On average, operating costs are escalated 0.7% per year for both oil and gas, up from 0.6% in the previous quarter.

Using a 60/40 blended gas/oil weighting, Macquarie Tristone compared the average base case against Nymex futures as of April 30, 2010. The average base-case results were 76% of Nymex futures in 2010, staying flat at 76% in 2014. This marks a slightly upward trend ,compared to early 2010 when front-year results were 74% of Nymex futures.

Quarter-to-quarter trends.

Compared with the past-quarter survey, the front-year pricing has increased for oil by 6% and has decreased for gas by 5%.

In later years, forecasts for oil prices in the fifth year increase by 2%, and forecasts for gas prices fall from the past quarter’s survey by 2%.

Macquarie Tristone first published its Energy Lender Price Survey in second-quarter 2005. From then until first-quarter 2009, base-case price curves were backwardated and increased noticeably quarter over quarter.

This changed in first-quarter 2009 with the financial crisis and significant decline in oil and gas prices. Since then, the curve has been in contango, and lender conservatism has lead to minimal shifts in base-case price curves.

Sensitivity-case results.

The second-quarter 2010 survey also includes a sensitivity case, which represents the lenders’ low or conservative price decks. Of the 38 participating banks, 31 provided a sensitivity case, which averaged a 20% discount to base-case lending policies for oil and a 21% discount for gas over the five-year strip.

The second-quarter 2010 average sensitivity-case oil price is $44.72, for example; for gas, $3.56, according to Macquarie Tristone’s findings.

Reserve-based lending scenario.

Using current assumptions, the base-case price decks from the second-quarter 2010 survey were used to calculate a discounted cash flow using PV-9 from the banks’ average. With a 60% advance rate and 20% upside limitation, the amount loaned to a possible acquirer would be about $66 million.

Using the same assumptions, but with base-case price decks from second-quarter 2009, the amount loaned to a possible acquirer would be about $62 million. The increase in base-case pricing from second-quarter 2009 to second-quarter 2010 results in a 6% increase in advance-rate amounts.

Macquarie Tristone is a global energy advisory firm that provides fully integrated investment banking, acquisitions and divestitures, and global equity-capital-markets services.

For more information, contact Rob Bilger at 713-651-4222.

Participants in the second-quarter 2010 survey include Allied Irish Bank, American National Bank, BancFirst, Bank of Scotland, Bank of Texas, Bank of the West, BMO Financial Group, Capital One N.A., Citibank N.A., Citizens Bank, Comerica Bank, Commonwealth Bank of Australia, Community National Bank, Coppermark Bank, Credit Agricole, DnB NOR Bank ASA, First Interstate Bank, First National Bank of Midland, Frost Bank, IberiaBank, ING Capital LLC, Keybank, Macquarie Bank, Mizuho Corp. Bank, National Bank of Canada, Natixis, RBC Capital Markets, Royal Bank of Scotland, Regions Bank, Societe Generale, Sterling Bank, Sumitomo Mitsui Banking Corp., Texas Capital Bank, Union Bank N.A., Wells Fargo, West Texas National Bank, Western National Bank, Whitney National Bank.