Many oil and gas companies grappling with weak energy prices face two more looming problems: tighter lines of credit and a fresh round of reserve write-downs.
Every spring and fall, banks review credit facilities for energy companies, calculating how much they will lend companies based on the value of their reserves. They give weight to price expectations, the size of a firm's reserves and the quality of its hedge book. Few energy firms will escape this autumn's so-called "borrowing base" evaluation unscathed and, in turn, will be assigned less favourable revolving lines of credit.
This added financial pinch comes as oil and gas companies assemble their budgets for 2016. Some Canadian companies are already struggling to keep onside with their debt covenants, and smaller credit lines mean it will be even more difficult for them to run their operations as oil prices continue to languish.
Lenders are expected to lower their energy-price expectations by 15 to 20 per cent, according to analysts at Moody's Investor Service. Most companies will have smaller reserves because they have slowed drilling activity in order to survive the past 17 months of slumping oil prices. Further, the extended downturn means healthy hedges are largely expired.
"I would think there would be more tightening coming," said Travis Lysak, head of law firm Fasken Martineau's insolvency and restructuring group in Calgary. "For most entities in the business, things have gotten worse."
In the United States, regulators insist this fall's reserve calculations must be predicated on oil being worth about $50 (U.S.) per barrel and natural gas being valued at around $2.70 per thousand cubic feet, according to Energy Aspects, a research firm with its headquarters in Britain.
"We think a 30-per-cent write-down in reserves is not unreasonable, based on the lower oil price," the firm said, referring to independent U.S. producers.
Struggling companies have been trying to shed assets outside their core business, but as buyers stand pat, sellers are sometimes resorting to parting with key property.
"The definition of non-core is getting broader and broader by the day," said Michael Joy, a lawyer specializing in oil and gas at BakerHostetler's Denver office.
Penn West Petroleum Ltd. is among the Canadian firms selling assets to pay down debt. Two weeks ago, it agreed to sell property in central Alberta for $192.5-million (Canadian). Last Thursday, it announced a deal to sell a slice of an oil project near Weyburn, Sask., for $205-million.
"The company's Weyburn interest generated material cash flow, underscoring the difficulties of generating proceeds [from asset sales] without depleting current cash flow," Travis Wood, an energy analyst at Toronto-Dominion Bank, said in a note last week. "Despite the cash generated from these deals, we remain concerned with the pro-forma business given the cash-flow nature of many of the disposed assets."
Without further asset sales, higher commodity prices, or "significant operational improvements," Penn West will "continue to face liquidity constraints" and the potential to breach its debt covenants within the 2016-17 window, Mr. Wood said.
Pacific Exploration & Production Corp., previously known as Pacific Rubiales Energy Corp., last Tuesday said it "obtained waivers" from its lenders regarding a debt covenant that demands the firm's net worth exceed $1-billion (U.S). The relief expires Dec. 28.
"During this period, the company will be in discussions with its lenders to address concerns during this low oil price environment," the company said in a statement.
Trican Well Service Ltd. on Sept. 25 joined the list of companies that have negotiated relaxed covenant terms with its lenders. Mr. Lysak, the Fasken lawyer, expects banks to continue to negotiate rather than force companies into receivership – not out of generosity, but out of self-interest.
"Early on when the price of oil started falling, there were a few [companies] that went into receivership and the sales processes were so poor and the recoveries were so poor, what lenders are saying is: 'If I just enforce my security tomorrow, put in a receiver and do a liquidation, my recoveries are going to be terrible.'"
Instead, bankers are trying to wait out the downturn, hoping their clients recover or, if they have to liquidate, prices will be better.