The landscape for the energy industry has changed dramatically, especially in the oil & gas sector, where the drastic fall in prices has accelerated the demise of E&P companies with marginally productive assets, excessive leverage, and high administrative costs. Lower commodity prices made much worse due to the COVID-19 pandemic has reduced both near-term profitability and the economic life of wells even further, resulting in greatly overstated reserves and inflated collateral values.
Unlike the 2014-2016 downturn, sponsor support, capital market funding and asset sales will not be as readily available to ailing companies. Equity sponsors and management teams are not always aligned with or incentivized towards the best interests of the lenders. Banks may become the fulcrum security and are likely to be forced to make a decision whether to liquidate collateral or to take equity in many energy companies that have lost significant value in their reserves.
“Lower for longer” is the new consensus view among experts. Until now, companies have been able to rely heavily on debt financing due to the high tolerance for risk in the credit markets. The widespread use of reserve-based revolving credit facilities, where reserves are valued twice per year and the determination of the borrowing base is largely left to the lender’s discretion, spells trouble for borrowers when redeterminations are made. While all industry participants face challenges in the current environment, the challenges, as well as potential solutions, vary by size and position in the value chain.
Large E&P Companies
Businesses are countering revenue declines by significantly reducing capital expenditures, laying off workers, and relying on hedge contracts and existing cash balances. However, new challenges will exist once existing hedge contracts expire, cash balances decline and borrowing base redeterminations are made. Possible finance options include:
- Drawing down revolvers
- Extending near-term maturities
- Accessing the junk bond market and equity raises
Mid-Size/Smaller E&P Companies
These companies are facing tougher times than the larger firms, as they don’t have significant hedge contracts, cash balances, or access to the capital markets.
- They face more difficulties than the large integrated majors because they do not have downstream operations to generate cash flow and generally do not have as many options for financing.
- Cutting operating costs, overhead and capital expenditures, through reductions in purchasing and layoffs, is essential to get to a breakeven level cash flow level, although existing commitments for drilling and other services can delay these cuts.
Getzler Henrich professionals have the knowledge and experience to assist companies throughout the industry in managing today’s difficult operating environment; solutions include:
Operating oil and gas properties on behalf of financial partners
- Our professionals have extensive experience in operations and can provide on-site presence to assess the functional activities and provide workable alternatives.
Reducing Costs/Improving Productivity
- Using Lean Sigma and best in class comparisons our team can identify opportunities to reduce costs and improve transparency in the field operations and address compliance issues.
Determining Breakeven Levels in an Uncertain Environment
- Utilizing cash flow projections our team can provide in-depth looks at various scenarios to achieve working capital objectives, that include issues of capital conservation vs. going for a “Hail Mary”.