A&D Intelligence

As if it isn’t bad enough out there already, cash-strapped E&Ps have a new boogey monster to fear: borrowing base rederminations.

While companies are pulling in the reigns to match capex to cash flow, every drop of liquidity matters to survival. And as redeterminations come due, scuttlebut has it that a surprise looms for E&Ps dependent upon credit.

Suddenly, feeling the pinch themselves, lenders will pull in their horns on valuing proved undeveloped locations.  Banks are expected to attach a valuation on PUDs of… zero—or close.

That’s right. You get your proved developed producings, but nada much mas. Because of tanking commodity prices, what was considered a PUD yesterday might not be deemed commercially viable today, and banks won’t be able to lend against it depending on their price deck and desired return on capital.

So what’s it mean? It means less liquidity than you first thought if indeed you are liquid. And it means many companies will be caught over the borrowing base as the line is adjusted down. And you’ll owe the piper.

Of course, for most caught overdrawn there simply won’t be cash or equivalents available. Assets will come flying loose to pay the bill. For those that can’t meet the call, blood will flow. You can look to buy their assets out of bankruptcy.

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

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