Will Banks Allow Another Slew Of Oil Bankruptcies?

Tyler Durden's picture

Authored by Irina Slav via OilPrice.com,

Last week, U.S. banks boosted the borrowing bases for several independent energy companies, lifting spirits in the industry. The move was taken as a sign that lenders are beginning to share in the optimism that oil and gas producers have been enjoying since the beginning of the year, with prices staying above $50.

While some banks seem to be sharing some of the optimism, others are more cautious. A recent analysis from Bloomberg Gadfly’s Lisa Abramowicz reveals that a lot of energy companies with revolving credit lines are tapping deep into these resources. Abramowicz cites data from Bloomberg Intelligence that shows at least 11 companies have used up more than two-thirds of their credit lines.

Banks, Abramowicz says, do not like this, so they may well decide to cut the credit lines of companies they consider risky. They can afford to—exposure to the oil and gas industry is more modest than it was three years ago, and Abramowicz argues that lenders can afford to let some smaller companies go under.

The latest Haynes & Boone borrowing base survey reveals that banks believe a fifth of energy companies will see their borrowing bases cut this year. The industry is a bit more pessimistic, seeing the portion of companies to suffer credit line cuts at 27 percent.

Now, this could be interpreted in two ways. One is the optimistic way, which basically comes down to “It’s just 20 percent, the other 80 percent are doing well.” That’s certainly true, and the latest demonstration of the optimistic view came less than a moth before Haynes & Boone released their survey.

In March, WTI traded below $50 for the better part of two weeks, sparking worries that banks may revise downwards their borrowing base redeterminations, and potentially stall the resurgence of the U.S. oil patch. The worry is still there, but the overall mood is upbeat—after all, after the bankruptcies the survivors emerged from the crisis leaner, meaner, and much better prepared to deal with adverse price environments.

Banks could not have failed to notice that, as evidenced by other data from the Haynes & Boone survey: the overwhelming majority of respondents in it, both from the banking and energy industries, believed that 76 percent of energy players will enjoy an increase of their borrowing bases this year. In the previous survey, from last fall, the majority of respondents expected happier borrowing base times for just 59 percent of energy companies.

However, the overall optimism seems to hinge on two factors: low production costs across the shale patch and OPEC’s imminent decision to extend its production output agreement for six more months. There may be a problem with the first one, giving reason to doubt the optimism.

While drillers are passionately talking about the tech improvements that have boosted their efficiencies and brought down costs, some – mostly from the oilfield service sector – argue that it was actually low service prices that led to the production cost drop.

Energy companies will be announcing their new credit agreements in the coming weeks, and oilfield service providers will likely continue to raise the prices of their services, affecting producers’ margins. All in all, the situation remains uncertain even though on the surface all is looking good for U.S. oil and gas.

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Raffie's picture

I'd think the banks will make a deal to OWN the bankrupt oil companies.

yogibear's picture

Central banks will print trillions to buy bk oil companies. They will allow nothing big to fail anymore.

silverer's picture

Too bad you can't print oil, eh bankers?

Lost in translation's picture

A better question might be, "will We The People allow the bankers to go on living?"

withglee's picture

The latest Haynes & Boone borrowing base survey reveals that banks believe a fifth of energy companies will see their borrowing bases cut this year. The industry is a bit more pessimistic, seeing the portion of companies to suffer credit line cuts at 27 percent.

This is what you have with an "improper" Medium of Exchange process. Rather than traders creating the money (i.e. making trading promises that span time and space and certifying them with the process), the money changers claim to be creating the money. Traders then go to the money changers, hat-in-hand, begging to get their trading promises certified. Accomplishing that they are then free to execute their plans and deliver on their promises.

Well ... maybe not.

Since the money changers can "de-certify" these traders promises, they can disrupt their plans. They force traders onto an uncertain playing field ... they exercise the power to favor some traders over others ... they front-run the MOE process ... they call it the business cycle.

With a "proper" MOE process, none of this nonsense can happen. Once a trader makes his promise and gets it certified in and by the process it does not change. He either delivers as promised and the money he created is returned and destroyed ... or he DEFAULTs on his promise and that DEFAULT is immediately mitigated by an INTEREST collection of equal amount. This "guarantees" perfect perpetual balance between the supply and demand for the MOE media .. and thus perpetual zero INFLATION.

The operative relation is: INFLATION = DEFAULT - INTEREST = zero.

Is it any wonder the money changers (and the governments they institute) favor the "improper" MOE process we traders (anyone buying with time payments is such a trader) must tolerate.

Iterative secession. The time has come. Then institute "proper" MOE processes in the new spaces.

Tom Beckner's picture

What if the bankers can start a war. Have the military attack a low cost producer and take enough production off the market to drive prices up.

Has this been done before with success for the bankers?


yngso's picture

Smart bankers who don't buy the hype. It's too late though. The glut will kill the price, and the financial industry will get a severe blow, which will be one of the main contributors  to crashing the world economy.