Analysis: US banks prune asset values

OREANDA-NEWS. October 09, 2015. US banks are reducing the asset values of domestic upstream independents by around 10-30pc because of lower oil prices, which is comfortable enough for most firms, unless oil prices fall further.

Early indications of the autumn asset redetermination are emerging, in which lenders assess the value of producers' oil and natural gas reserves, partly based on average prices. Reserves are key assets for any upstream company, against which they take out loans or lines of credit. They are worth a lot less with crude prices around six-year lows.

The asset value of the top producer in the Bakken shale formation, Whiting Petroleum, may fall by nearly 20pc to \\$3.8bn, chief executive James Volker says. But it will still enjoy a cushion against its lending commitment. "Even with the new redetermination, I believe that we will maintain the \\$3.5bn commitment on our borrowing base from our group of banks, although we do not intend to use it," Volker says.

US Gulf of Mexico-focused producer Energy XXI has reduced the value of its reserve base by 26pc compared with a year ago. Oasis Petroleum may face a 10pc reduction compared with now.

Most of the top-12 US independent oil and gas producers had negative free cash flow in the first half, as their operating cash flows fell at a faster pace than their capital expenditure (capex). They plugged the gap by raising more debt, selling assets and dipping into cash reserves. Top independent producer ConocoPhillips had negative free cash flow of \\$1.7bn in the first half compared with a positive \\$2bn in January-June 2014. The company took on an additional \\$2.5bn of debt in the second quarter to help meet the cash shortfall.

But with oil prices expected to stay lower for longer, companies are under pressure to accelerate capex cuts and divestments in the second half, as their ability to borrow comes under strain. Chesapeake Energy plans new asset sales and cost-cutting measures. "Just to reiterate our near-term priorities — maximise liquidity," chief executive Doug Lawler says. The company aims to reduce its headcount by 15pc. Whiting is "well on the way" to sell as much as \\$1bn of assets this year, Volker says.

Analysts expect banks to avoid making sharp reductions in the value of the reserves, as producers try to sell assets and tighten their belts further. "Our base case assumes lenders will not turn off access to capital overnight, as banks could ultimately face some significant write-downs, if many US producers — their clients — are allowed to go bankrupt," UK-based consultancy Energy Aspects says. "So, conditions are likely to be relaxed and will impact only those with very high debt burdens."