Bankers Tell Drillers: Keep Your Chin Up, Things Aren't So Bad

(Bloomberg) -- The oil industry may have an inferiority complex.

That's the takeaway from a survey of drillers and lenders that found crude producers were more pessimistic about the future than the banks holding their loans. With oil CEOs and CFOs on the cusp of their semi-annual credit reviews, bankers say the threat of explorers seeing their borrowing bases shrink is receding, according to the survey by law firm Haynes and Boone LLP released Friday.

Only five percent of respondents expect borrowing base cuts will tip companies into bankruptcy, compared with 13 percent a year ago, according to the survey. Haynes and Boone attributed the brightening forecast to cost-cutting by oil producers and their equipment providers that enabled them to cope with the tumble in crude prices from above $100 a barrel as recently as three years ago.

The divergent outlook between drillers and bankers “seems counter-intuitive, since producers by nature are more optimistic and bankers are more conservative,” Buddy Clark, Hayes and Boone's energy practice co-chair, said in a statement that accompanied the survey results.

“Reading between the lines, it may be that banks remain reluctant to take any aggressive action reducing borrowing bases closer to their true value for fear of putting too much pressure on some producers who have been financially distressed since the beginning of this downturn in prices,” Clark said.

To read how energy debt is selling like it's 2014, click here.

Respondents estimated 26 percent of borrowers will see their borrowing bases cut during the autumn reviews. That's an improvement from a year ago, when 41 percent of borrowers were expected to feel the squeeze.

West Texas Intermediate, the U.S. benchmark crude, has hovered around $50 a barrel as production caps by OPEC and allied nations such as Russia eroded a worldwide supply glut. Those efforts have been somewhat offset by rising output from U.S. shale fields.

The credit lines are a critical source of capital for oil explorers. Twice a year, in April and October, banks review the amount they're willing to lend each client in a process called redetermination, which is a barometer of the industry's health.

Between the end of 2015 and the last round of assessments earlier this year, the average borrowing base was cut by 16 percent, according to data compiled by Bloomberg. The survey also highlighted the role of private equity in the sector. More than two-thirds of respondents thought over half of new reserved-based loans entered into in 2017 have been with producers backed by private equity.

To contact the reporter on this story: Meenal Vamburkar in New York at mvamburkar@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Joe Carroll