Debt takes priority for US upstream independents |Argus Media

The long-anticipated “now-or-never” moment for debt-heavy US shale oil producers is upon them, with efforts to shore up balance sheets meeting mixed results.

US independents’ ability to service their debt has gained top priority, as many, even those with stronger balance sheets, are borrowing more following the collapse in crude prices. Key Permian operator Pioneer Natural Resources last month scaled up a debt offering to $750mn from a planned $500mn, while smaller operator Diversified Oil and Gas closed a 10-year, $160mn term loan, following recent asset acquisitions. 

But not all are enjoying successes. Diamondback Energy only secured $208mn out of a $500mn note it issued for 2025, part of which was to buy back a $400mn 2021 loan belonging to Energen, a firm it acquired in 2018. Callon Petroleum cancelled a private exchange offer for $300mn of existing loans with new notes, while SM Energy is still seeking to swap some existing loans with new borrowings, on which it will pay higher interest rates but which will be due later.

Producers’ debt-management abilities have come under greater strain, with their ability to borrow shrinking drastically as falling commodity prices dent the value of their oil and gas reserves — the main asset against which they raise funds. Banks assess the value of these reserves based on oil and gas futures prices in a biannual exercise called borrowing base redetermination. Credit ratings agency Moody’s Investors Service earlier this year estimated that North American upstream firms had $86bn of debt maturing in 2020-24. It now expects borrowing bases to fall by an average of 20-30pc in the spring redetermination, but with some firms facing drops of as high as 40pc.

As independents have already sharply lowered their 2020 spending plans, banks are likely to advance less credit against their proven undeveloped reserves than proven developed (PD) assets in the spring, as the former require more investment to bring oil into production. PD sites can use existing wells and facilities.

In the loop

Many producers are getting tied up in a loop they may find it difficult to get out of. Lower access to credit will worsen their liquidity profile and impede their ability to reinvest, in turn further reducing their reserve base and exacerbating problems with access to capital. Firms may try workarounds such as signing new credit agreements at higher interest rates, while lenders may add provisions that compel operators to use cash above a certain level to first repay revolving credit lines.

This pinch is being felt the most by smaller leveraged operators. Centennial Resource Development’s borrowing base has been reduced to $700mn from $1.2bn, while Chaparral Energy faces a cut to $175mn from $325mn, Moody’s says. Extraction Oil and Gas had a cut to $650mn from $950mn, and is evaluating its options to bolster liquidity after skipping interest payments this month on its 2024 notes.

As debt-servicing challenges rise, bankruptcy filings are already increasing. Small Texas-based operator Freedom Oil and Gas filed for protection as it was unable to honor over $10mn of debt. It joins bigger peers Whiting Petroleum, which is seeking to deleverage by exchanging all its debt of more than $2.2bn for new equity, and Ultra Petroleum, which plans to eliminate about $2bn in loans.
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