By Jonathan Schwarzberg
NEW YORK, Aug 20 (Reuters) - Exploration and production (E&P) companies are about a month away from redetermining the borrowing bases on their revolvers, but industry insiders say the process will not be as easy this time as it was in the spring.
Energy companies are facing a major hurdle now as the oil hedges put in place last year around this time are rolling off just as the redetermination period arrives.
"It's the not-so-perfect storm," said Kristen Campana, a partner at Bracewell & Giuliani.
Energy companies found a variety of tactics in the spring to pay down their revolvers in an effort to meet the newly determined borrowing bases, which are typically tied to reserves. The reserves took steep hits as oil dropped from north of US$100 per barrel last summer to around US$50 this spring. Since then, the oil price has dropped to levels not seen since 2009. On Thursday the price of U.S. West Texas Intermediate crude oil was trading just below US$41 per barrel.
This spring E&P company Atlas Resource Partners arranged a US$250m second-lien loan to pay down its revolver through GSO Capital and Magnetar Capital. Independent energy company Comstock Resources sold US$700m of 10% first-lien bonds while Energy XXI Gulf Coast sold US$1.45bn of second-lien notes.
"The spring redetermination season wasn't that traumatic, but the next redetermination in the fall is expected to be more severe and more problematic," said Mike Lorusso, managing director of energy for corporate finance at CIT. "Hedges are beginning to roll off, prices have not recovered and there is a more widely accepted realization that prices will remain lower over a longer period."
OIL OPTIONS
Campana said she does not anticipate the capital markets will be completely closed off, but banks and investors are going to look at credits on an individual basis.
"A lot of it depends on the company itself," Campana said. "If the problem really is the price of oil, then they do have opportunity for investments from third parties."
She said the first preference for companies is probably going to their existing lenders and asking them for amendments allowing them to stretch their borrowing bases despite dropping oil prices.
"It's quick, cheap (compared to the expense of a new offering or exchange), clean and you're done," Campana added.
If that option is not available, Campana said companies are scouring the language in their debt documents to see where they can add debt. In some cases, this may be through exchanges, an area in which Campana has received a lot of calls.
To the extent there is availability in the various debt instrument covenants, the debt exchange moves unsecured debt to a secured level, giving the originally unsecured investors more safety. However, they would still be paid out after the first-lien investors, giving those investors an incentive to back the exchange as well, as the company retains more cash from a lower or payment-in-kind interest rate, and they don't have to worry about losing their place in the capital structure.
If banks or current investors are not willing to provide additional capital, Campana said other options will be available from third-party lenders such as hedge funds and private equity funds, which have now been active lenders in the market for 15-20 years, especially on the second-lien and subordinated debt side.
"Different funds have different agendas. Some are very short term and willing to buy at 50 and sell at 70 and call it a day," she said. "Some are interested in a loan-to-own strategy. Some are looking for a long-term return and are willing to hold onto something for years."
HERE TO STAY
Regardless of the strategy, an industry source said that anyone involved with the energy industry is coming to grips with the possibility that oil prices at these levels could be here for a while.
"The reality that this is not a short-term correction is establishing a new normal," the source said, noting that because of that the banks are going to be much less likely to grant lenience when determining borrowing bases. "Companies that had a bit more softness in the first round are beginning discussions, but most of the serious discussions will begin in about a month."
Campana said this could end up leading to a variety of outcomes and that smaller companies with less capital could end up defaulting or as takeover targets.
"I don't think there's going to be a floodgate of bankruptcies, but I think there are going to be a lot teetering on the brink as they look at options," Campana said.
KKR & Co-backed energy company Samson may be the first to announce bankruptcy, as the company said it expects to file for Chapter 11 bankruptcy protection by September 16. The company revealed on August 14 a restructuring agreement with a group of second-lien lenders to cut debt and provide additional capital in exchange for control of the company. (Editing By Chris Mangham Jon Methven)