Bleak Midwinter view of 1H 2016

Is this the winter of our discontent?  

Probably not; times are tough in the O&G sector – but this being the season of good cheer, lets look at how much worse it might get in 1H 2016.

Interest base rates

Later today the Fed is expected to raise interest rates – the first time since mid 2006.  I can barely recall 2006, so nearly a decade has gone by in the era of cheap money.  This isn’t all about to change overnight; the expectation is 25bps, but it is  one variable amongst many that will impact borrowers.  O&G companies are typically big borrowers…  In good times a few basis-points might go unnoticed, in 2016, these will contribute to pain for those already stretched.

RBL – redeterminations and PUDs

The lending banks are going through the 5 stages of Grief; denial, anger, bargaining, depression and acceptance.  

Summer 2015 was denial, oil had had its dead-cat bounce and borrowing-bases were deemed to be fit for purpose.  

Fall 2015 was anger, a fair bit of noise about redeterminations and certain banks downsizing RBL teams, but overall it was noise without any serious downgrades of borrowing bases as banks chose not to crystalze the downswing in oil prices.  

Spring 2016 – looks like bargaining will be a good analogy, as banks and borrowers get down to real negotiations about covenants and redeterminations.   Depression will probably follow rapidly.

To add spice to this mix, there is talk that US regulators are very concerned that the extensive lending to the O&G sector could represent a systemic risk akin to the sub-prime.  Clearly it is different, but the net result may be a restriction on PUD lending – so that RBL goes back to PDP lending (with a haircut).  The alternate will be for banks to increase their Tier 1 capital to offset the ‘risky’ PUD lending.   Forget 2P lending completely.   This is likely to ripple through to European lending, as the US banks won’t be in the bigger syndicates, or worse, the European banks will follow suit.

Continue reading “Bleak Midwinter view of 1H 2016”