Junk-Rated Energy Companies Face Cash Crunch as Borrowing Cut

(Bloomberg) -- The weakest oil and gas companies are facing heightened liquidity pressure after bank lenders cut their exposure amid low commodity prices.

Most high-yield borrowers saw their reserve-based loans cut after their spring redetermination, according to a new report from S&P Global Ratings. Borrowing bases, which are determined by the collateral value of oil and gas reserves, were cut by an average of 23%. Credit commitments were cut by 15% on average, the ratings company said.

“This redetermination cycle has been more prolonged and less forgiving than previous cycles, with a number of the most distressed E&Ps still working through the process,” S&P analysts Paul O’Donnell and Carin Dehne-Kiley wrote in the report. S&P looked at 34 companies that have announced the results of their bank redetermination.

A reduction in borrowing capacity for high-yield energy companies comes at a time when they most need access to liquidity. Oil and gas prices fell to historic lows as the coronavirus pandemic slashed demand, and Saudi Arabia and Russia competed for market share. Capital markets have remained closed to most energy borrowers, sending the weakest companies into bankruptcy.

Drawn Balances

The average drawn balance on high-yield producer credit facilities is now more than 50%, with about a third of producers drawn at more than 70% of elected commitments, according to S&P.

Chaparral Energy Inc. and Oasis Petroleum Inc. faced the worst cuts on a percentage basis, with their elected commitments cut by 46% and 44%, respectively, S&P said. Chaparral saw its borrowing base cut by 46% and Oasis was cut by 53%.

Along with Chaparral, Bruin E&P Partners LLC and Jonah Energy LLC saw their commitments cut below the drawn amount, requiring them to repay the deficit within six months.

Banks also tightened their protections on credit facilities, including lower leverage thresholds, anti-cash hoarding restrictions, reduced dividend caps, limits to the amount of unsecured debt that can be repurchased and higher interest rates, S&P said.

“These amendments point to the waning confidence and risk tolerance that the banks have for the sector,” the analysts wrote.

Representatives for Chaparral, Oasis, Bruin E&P and Jonah Energy weren’t immediately available to comment.

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