Lending limits may spur oil industry shakeout

Bank review may make it hard for some to stay in business

A semiannual bank review of credit lines for U.S. oil and natural gas producers may go a long way toward determining whether there will be a shakeout in the industry this year and how extensive it might be.

In a new report, Standard & Poor’s Rating Services said it expects the “borrowing bases” for 45 speculative-grade producers will fall by an average 20%-30% when banks take a fresh look in April.

That will make it difficult for some companies to stay in business.

That gloomy forecast was one factor in S&P’s decision to lower its credit ratings for 25 of the pro- ducers, most of them small and midsize operators, but nevertheless a big part of the boom in shale oil and gas over the past several years.

“For many of our rated issuers, the rating actions reflect our ex- pectation for material decline in credit measures due to lower prices and production, as well as liquidity risks, particularly with respect to the April 2016 revolving credit facility bank borrowing base redeterminations,” S&P said.

While futures prices for oil are down significantly and hedging contracts are expiring, operators find it increasingly difficult to replace their oil reserves, reducing their appeal to banks.

“So many new companies jumped in when the credit markets were so accommodating,” Ben Tsocanos, a credit analyst with S&P, said in an interview. “It just caught up with them.”

This comes as oil prices hover around $30 a barrel, down 70% over the past 14 months. At one point last week, U.S. crude prices fell to slightly more than $26 a barrel, their lowest level since 2003.

The S&P review follows a recent revision of the credit agency’s outlook for oil and gas prices.

Released in January, that report slashed S&P’s 2016 forecasts for Brent and West Texas Intermediate crude, the two leading benchmarks for oil, from $55 and $50 a barrel, respectively, to $40 a barrel.

S&P warned at the time that the new, direr forecasts could lead to downgrades across the oil and gas patch

That prediction came true, first this month, when the agency lowered credit ratings and outlooks for 13 large, investment-grade producers, including Chevron, Continental Resources, Devon Energy and Marathon Oil.

S&P dropped a second shoe when it released its report on the smaller, speculative-grade producers.

Among those whose credit ratings were reduced are Whiting Petroleum, the largest oil producer in North Dakota, home to one of the leading oil-shale plays in the USA.

Other companies assigned lower ratings include Bill Barrett, Breitburn Energy Partners, Denbury Resources and Oasis Petroleum.

“Many companies are trying to live within their own cash flows this year, so they don’t plan to borrow more,” Tsocanos said. “But those companies that don’t have a lot of room under their bank lines could be in trouble if they’re reduced.”