These 11 Oil Drillers Still Have Maxed Out Credit Lines, Despite Energy HY Recovery

Tyler Durden's picture

The first signs of financial distress often surface when CFO's start to play games with their balance sheet.  First, comes the ballooning of current liabilities as payable balances are stretched out to the max to preserve cash.  Next, the most astute vendors catch on fairly quickly to the gamesmanship and move to COD terms for new purchases.  Once that happens, the gaming CFO typically faces a 'run on the bank' which prompts a full revolver draw and generally, soon thereafter, a bankruptcy filing.  

As Bloomberg points out, this exact scenario played out last year in the oil industry when crude prices tanked and E&P companies were forced to max out their credit lines.

For example, consider last fall, when more than 20 energy companies had borrowed more than two-thirds of their limit on their credit lines, according to Spencer Cutter, a senior credit analyst with Bloomberg Intelligence. More than four of those have since filed for bankruptcy. The degree of distress last year wasn't surprising given the sharp plunge in oil prices that started in 2014. A mounting number of energy companies were forced to sell assets, restructure or file for bankruptcy.

But now that oil prices have rebounded and borrowing costs for riskier junk-rated oil companies have dropped, it makes sense to think that the worst companies have either filed for bankruptcy or recovered, right?  Well, not so much actually.

This is not the case. For evidence, just look at the relatively high number of companies relying on revolving loans for their financing needs. At least 11 oil and gas producers are using 70 percent or more of their borrowing-base credit lines, according to Cutter. That includes smaller companies such as Trinity River Energy, Yuma Energy and Mid-Con Energy, and some larger ones such as Sanchez Production Partners and California Resources.



Of course, while maxing out credit lines can provide the short-term liquidity required to avoid bankruptcy in the short-term, eventually banks will have the opportunity to reset spreads and reduce exposures and then the game generally comes to an abrupt end.

Similarly, banks could cut lines of energy companies for failing to have a more sustainable capital structure, forcing them to scramble for financing when investors are still somewhat skeptical about their future. About 24 percent of exploration and production companies will likely have the base size of their revolving credit lines cut in the upcoming round of redeterminations, according to a Haynes and Boone survey.


To be clear, this is a better outlook than six or seven months ago, when oil prices were lower and OPEC members hadn't yet agreed to curb production. But in an odd twist, banks may be more willing to allow smaller, less-important energy companies to fail now than they were a year ago. That's because the largest banks have already cut their exposure to the asset class and are less at risk of losses should these borrowers go belly up. Wall Street's biggest banks just lived through a significant scare after helping oil and gas companies lever up, only to watch them suffer amid plunging crude values. It's logical these lenders would continue to cut their potential losses now, during a relatively sanguine period, by limiting their loans to the weakest companies.


Over the next few weeks, companies will start announcing their new revolving credit agreements. Investors shouldn't be surprised at some bad news for smaller energy companies that still haven't fortified their balance sheets. Just because oil prices have stabilized and even marginally increased doesn't mean that there won't be additional rounds of energy-related bankruptcies and restructurings in the near future.

That said, high yield investors don't seem to be all that worried so we're sure everything is just fine.


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bobdobolina's picture

how is it possible that despite record profits these guys have not been able to get their "stuff" together? Beats me...

rockstone's picture

Who in this report realized record profits last year? Or 2015 for that matter?


Bill of Rights's picture

Owe the bank $100,000 your problem, Owe the bank ?000,000,000 banks problem.

Antifaschistische's picture

no need to fear...the major players are waiting for these little boys to crumble so they can gobble them up.   Fed induced massive credit lines with the majors will help destroy the small companies as their credit lines get whacked.   Fed counterfeiting fascism rocks!!

sinbad2's picture

Yeah I remember that line when they used it with China, but it hasn't quite worked out that way, has it?

biker's picture
biker (not verified) Apr 18, 2017 2:20 PM


Feces Fuel


Fischer Tropsch process which takes organic garbage and turns it into synthetic gasoline


sinbad2's picture

It's easy to take a shit in a bike tank, and you might ge some distance out of it, but it would be really difficult to get it into the tank of most cars, and how far would you get?

You should invent a shit funnel?

NoDebt's picture

Didn't the Fed lay down the law with some banks about not foreclosing on bad energy company debt about a year ago?  Mmmmm.... I'm almost certain I remember reading that on here.  

I'm assuming this situation must be related to that one somehow, right Tyler?  I'd love to hear your thoughts on that if I'm remembering my facts correctly.



VladLenin's picture

Balance sheets are so last century.

buzzsaw99's picture

wow hy is volatile.

asteroids's picture

You "monetize" your shale by having GS ramp up oil (for a small fee) maxing out your credit card and sending the cash to the Bahamas or some other tax haven. Oil comes crashing down, and you declare bankruptcy and send the keys to the bank. What a life.

Last of the Middle Class's picture

That explains why $49 oil equates to $2.35 gas. Profit margin baby!


shortonoil's picture


"That explains why $49 oil equates to $2.35 gas. Profit margin baby"


A refinery yield that is now down to 61% explains it. Refineries are now paying more for the crude that they use than what they are getting for the finished product. After a few of them go broke expect $4.00 gas.

artvandalai's picture

Not news. Their stock prices already tell us what the deal is. But probably a good time to pick a couple you think might make it and buy.

Cardinal Fang's picture

Maybe they should diversify into retail or Houston real estate.

Wait, what?