June 2, 2021 - by Bridget Marsh. On June 1st, the LSTA hosted Haynes and Boone partners, Jeff Nichols, Kraig Grahmann, Kelli Norfleet, and Chris Reagen, who presented the Semi-Annual Oil and Gas Industry Update. The results of the Haynes and Boone 13th Borrowing Base Redetermination Survey, which provides a clear, forward looking idea of what producers should expect given price volatility and the market, were reviewed. 70% of this spring’s survey respondents were oil and gas producers or their bankers. Revealing only a hint of optimism when it comes to borrowing bases, most respondents expect a zero to 10% increase of borrowing bases this spring. When asked what percentage of anticipated future production have reserve based credit facility borrowers hedged for the next 12 months, it seems that the trend identified in the past few surveys is continuing, with producers hedging a significant proportion of their production. Improved commodity prices is one factor driving increased hedging, but even before that improvement in prices, bankers were pushing borrowers to lock in prices to try to stop them from completely bottoming out.
The upstream oil and gas industry has settled into a new normal with respect to capital raising. The most significant change is an increased use of debt from capital markets, which represents a major shift from a few years ago. But bank debt, including RBL debt, still plays a big role and remains the number three source of capital just behind capital markets. When asked where that capital is going, 42 % said the Permian producing area in Texas, and the other two areas drawing strong interest were the Eagle Ford/Austin Chalk and Haynesville which stretches out through Texas and Louisiana. The plays with a heavy federal regulatory factor / significant federal leasing were of less interest.
ESG trends in the oil and gas space have taken the industry by storm this year. A lot of capital is being invested in this area, and companies are hearing from investors and lenders about ESG. No longer are environmental factors alone dominating. Although a company’s carbon footprint, water pollution record, and climate change impact are all factors of great interest, as of 2020, 40% of the issues being voted on by shareholders related to governance. A company’s lobbying efforts, corruption and bribery policies, board composition, and diversity record were also areas of gaining attention. Companies looking to raise debt or capital are expected to make some ESG disclosure, and their investors want a way to compare companies. This can be tricky with a dearth of uniform disclosure efforts. It should be noted that increased stockholder activism – seen a lot in 2020 – has also been increasing in 2021.
Finally, E&P bankruptcy exits were reviewed. For companies filing for bankruptcy, Texas remains the most popular state, followed by Delaware. In 2020, there were 46 bankrutpcy filings, but that pace has now slowed, with only 8 filings of generally smaller companies in 1Q21. The most common form of exit strategy was a debt for equity conversion and the 363 sale of assets.
The key takeaway is that 2021 is showing signs of slight optimism, but players should keep a close eye on potential headwinds later in the year. Click here for the slides and here for replay.
