Houston banks sell off energy loans, cut credit lines to oil and gas companies
Paul Takahashi July 21, 2020 houstonchronicle.com
Banks are selling off loans and cutting credit lines to oil and gas companies to reduce their risk of defaults after the coronavirus pandemic wreaked havoc on the energy industry.
Hancock Whitney, a regional bank with six branches in Houston, recently said it will sell $497 million in energy loans to Los Angeles-based Oaktree Capital Management in a deal that the bank said will “significantly de-risk our balance sheet.” The bank said it will receive $257.5 million in proceeds from the sale and take a pre-tax loss of about $160.1 million on the sale.
“The primary objective of this sale is to continue de-risking our loan portfolio by accelerating the disposition of assets that have been impacted by ongoing issues within the energy industry, and have now been further complicated by COVID-19,” CEO John M. Hairston said in a statement. “While operating from a solid capital base, we decided to be opportunistic and sell these assets today, significantly de-risking our balance sheet.”
U.S. oil and gas companies, which have increasingly relied on banks to fund operations and new drilling, are finding it difficult to attract capital investment after years of lagging financial performance, accelerated by the recent oil bust caused by the global pandemic. Banks and Wall Street investors are pulling back from the energy industry as the value of oil and gas assets used as collateral for loans and credit has fallen with the price of oil.
“Capital markets have soured on U.S. oil and gas investments starting in late 2018,” said Lee Maginniss, managing director of Alvarez & Marsal’s corporate improvement energy practice. “The distress that we’re in right now has made access to capital restrictive and limited. Recapitalization is very difficult.”
The result has left energy companies without a lifeline as they struggle to weather the downturn in crude prices, slashing budgets and halting production.
Several companies, including Antero Resources Corp., Centennial Resource Development and Oasis Petroleum, have seen their credit lines slashed in recent months. Other companies are unable to secure capital as investors flee from the sector.
During the last oil bust in 2014-16, banks largely worked with energy companies to restructure their debt and continued to invest in the industry. After the coronavirus-driven oil crash — the second downturn in six years for the industry — there’s little appetite to help companies weather the storm, Maginniss said.
Alvarez & Marsal, one of the biggest restructuring firms in the energy sector, expects bankruptcies and consolidation to rise as companies struggle to survive the downturn.
Bruin E&P Partners last week filed for Chapter 11 bankruptcy after its lenders reduced the company’s credit line by 44 percent to $400 million, down from $710 million, causing the company to be overdrawn by more than $170 million. The cash-strapped Houston oil and gas company tried to negotiate with its major creditors to resolve their cash crunch, but said it was unable to come to an agreement given the market downturn.
“The recent extreme and sudden downturn fundamentally changed the economic landscape surrounding the Debtors’ out-of-court deleveraging options and strategic alternatives that might have otherwise been available had the world not been in the midst of a global pandemic,” CEO Matthew Steele said in a court filing Friday.
Hancock Whitney, a Mississippi-based bank active along the Gulf Coast, said it has reduced its energy loan holdings to $352 million as of June 30, down from $940 million on March 31. Energy loans represent 1.7 percent of the bank’s total loans, down from 4.4 percent four months ago.
Nationally, U.S. banks hold about $650 billion in loans to energy companies, or about 3.5 percent of total bank assets, according to JPMorgan Chase.
Stephen Rassenfoss, JPT Emerging Technology Editor | 20 July 2020
Editor’s Note: This is the first of a three-part series focusing on the contraction of the North American shale sector
Judgment day has arrived for companies of the oil shale boom and many are looking superfluous.
That is label used by Deloitte to describe 50% of the companies in its shale universe, representing nearly half the production.
The dictionary defines superfluous as more than is needed or wanted. The accounting firm describes them as “companies with a high-risk profile, making them unnecessary bets in the current environment.”
During the current deep funk in the oil business, these companies with low grades for financial strength and operational efficiency are in jeopardy.
“The grim financial position of many companies and weak economic outlook could trigger deep consolidation in the US shale industry,” Deloitte wrote in a recent report.
Note the use of the qualifier “could” in that sentence.
The accounting firm’s data deliver a clear warning—if oil prices remain around $35/bbl more than half the companies in the shale business are either technically insolvent or financially stressed. The pace of change will depend on how long those weak players can continue making payroll and paying the bills.
Bankers will play a critical role in the process based on their semiannual evaluations of how large a reserve-based loan an oil company can handle. Companies secure these loans with assets such as reserves (PV10) but the process also considers other debts owed, likely future oil prices, and other factors which may affect the company’s ability to repay the debt.
Those reviews got tougher in April after the oil market crash inspired some deeply negative thinking. Based on past crashes, however, don’t expect a rapid response by bankers, whose options all come with significant downsides.
The simplest exit strategy is to force the borrower to sell its assets, but in the current market that is likely to yield dimes per dollar owed. Takeovers and mergers are not happening now in the oil business. And bankers are not in the business of trading stock for debt or repossessing oil assets and managing companies’ long term.
It is better to offer a stern warning and put off any action and hoping that oil prices and improved management will fix things.
In the industry, people call it “lend, extend, and pretend,” said Scott Sanderson, a partner of Deloitte. While he said the accounting firm’s analysis makes a strong case for consolidation, that hasn’t happened during previous downturns.
He said it is a fashionable argument to say this downturn is different. But so far there have been almost no acquisitions, and the number of bankruptcy filings is low considering the brutal state of oil markets.
During the first half of the year 18 oil companies filed for bankruptcy protection, which is well behind the pace in 2016, when 70 cases were filed, according to the Oil Patch Bankruptcy Monitor compiled by Haynes and Boone.
But the pessimistic outlook of those who responded to other surveys by the law firm suggest the weeding out process has quietly begun.
The outlook for the oil business changed in a day in March. Do not look for a rush to file for bankruptcy.
The peak in bankruptcies after the 2014 price crash was in 2016. The lag this time could be shorter. The recent filing by Chesapeake helped double the value of the money owed by companies that filed during the first half of 2020 to more than $20 billion.
Haynes and Boone said, “It is reasonable to expect that a substantial number of producers will continue to seek protection from creditors in bankruptcy.” And that will include some big names.
Charlie Beckham, a Haynes and Boone bankruptcy partner, predicted, “There are some big fish headed for the spillways.”
Big companies like Chesapeake will get the attention, but there are also a lot of small fish out there that could be forced to file by the time of their next big payment due.
One thing that is different about this crash compared to the last one is creditors are not as willing to negotiate deals to reduce debts with everybody.
One of those companies was Templar Energy, which was sold at a bankruptcy hearing in mid-July.
The Chapter 11 case was filed on 1 June in Delaware, but a declaration of facts from its Chief Executive Officer Brian Simmons described how its debt crisis began a year ago when the value of assets it put up to secure a bank loan was cut to less than what it owed, which ultimately led to a deal with creditors to sell off all its assets.
This spring, many shale companies likely got similar notices as lenders expecting oil prices to remain lower for much longer cut the value of assets, according to the Haynes & Boone survey.
During the last downturn, Templar was one of many shale companies that cut a deal with lenders. Templar reduced its debt by $1.4 billion in 2016.
“There was a wave of Chapter 11 filings following the last downturn and most of them ended up restructuring, often relaunching with the same management team,” said Andrew Dittmar, senior mergers and acquisitions analyst with Enverus. This time “some of the creditors appear to be a bit more skeptical on recapitalizing these guys and turning them loose,” he said.
Templar’s creditors are so skeptical of its ability to become a successful operator, they pushed for a sale that recently generated 20 cents per dollar owed.
Not an attractive outcome, but the alternatives require committing money and time to turning around a company whose value has been sinking for years. It is not alone.
“Recent filings especially appear to be resulting in more proposed 363 sales,” said Dittmar, referring to the section of the bankruptcy code covering asset sales to settle debt claims.
“The rise in proposed sales may indicate fewer debtholders are willing to work a restructuring deal to take equity and would prefer an exit, even if that involves a sale into a challenging market,” he said.
Templar is one of three private-equity-backed companies involved in bankruptcy sales, along with Gavilan Resources (in partnership with Blackstone)and Sable Permian Resources–The Energy and Minerals Group.
Oil shale companies have been a black hole for cash for investors whose money allowed shale producers to massively increase production. But many of those borrowers never generated sufficient cash flow to drill the wells needed to sustain that production, much less reward investors.
Over the past decade, negative cash flow in the companies tracked by Deloitte totaled $300 billion, resulting in $450 billion worth of impairments—writedowns of investments and loans—and nearly 200 bankruptcies.
The relationship between big investors and shale producers has broken down, based on anonymous comments in a recent survey of industry experts by the Federal Reserve Bank of Dallas.
“Access to capital and our bank group's willingness to extend our access to credit in our reserve-based loan remains our greatest risk and challenge,” said one, adding that his company was a financially strong, low-cost producer.
Another simply asked: “Is oil and gas private equity over?”
The “Great Compression” described by Deloitte certainly looks possible, though it will take some time.
A looming question is what will happen to the wells. In the past, there was a market for bargain-priced producing wells. But buyers need to consider that companies in the extraneous category also get low grades for operational skills such as drilling, fracturing, and producing those wells. And more wells will be needed to sustain that production.
“They are scared off by the constant churn of capital required to maintain production,” Sanderson said.
Stephen Rassenfoss, JPT Emerging Technology Editor | 22 July 2020
If you created an endangered shale operator checklist, Templar Energy would check most of the boxes.
It was one of many companies started early in the decade by private-equity investors with a goal of profiting from shale acreage development
It was born in 2012 when $100/bbl oil looked like a given. The founding firm First Reserve’s announcement said it brought in an experienced leadership team led by a chief executive officer who had delivered on that plan before, David Le Norman.
The plan for companies like Templar was to lease promising acreage, drill some good wells, and sell to an operator for a large profit in a few years.
“Companies piled on debt, bought acreage, and developed it for sale,” said Buddy Clark, who co-chairs Haynes and Boone's energy practice group and primarily represents oil borrowers.
That plan hit a wall in late 2014 when the era of $100/bbl oil abruptly ended and the goal shifted to finding a way to make money at $50/bbl. The income from the wells Templar had mass-produced back when it had as many as 13 rigs working could not support the $1.7-billion debt it had accumulated.
Back then the shale creditors were generally willing to help lighten that load. Templar’s summary recently filed with its Chapter 11 bankruptcy protection case said investors agreed to reduce its debt by $1.4 billion in exchange for 45% of the Templar stock and $133 million of the $365 million in cash raised by selling shares to recapitalize the company. At the time, the company could borrow up to $600 million from the bank.
The downside was Templar began its next era with less capital, as did many companies that restructured their loans back then.
“In 2016 and 2017 there were a lot of restructurings,” said Charlie Beckham, a Haynes and Boone bankruptcy partner. He said, “There were doubts about whether they were fixing the problem” because many of the restructurings resulted in a lot of debt left on the books of E&P companies. They assumed that by 2019 and 2020 commodity prices would have bounced up and strengthened those balance sheets.
Instead, by 2019 prices were still down around $50/bbl and the expected oil production per acre had sunk because plans to maximize production with tightly spaced arrays of wells and massive fractures fell far short of expectations.
Templar’s oil production fell to half the level at its peak in 2016, based on production reports from the data service Shale Profile.
After bankers completed their semiannual evaluation of the reserves in April 2019, they informed Templar that the reserves securing its $437-million debt were worth $415 million—meaning it would all come due later in the year, according to the summary.
The summary was signed by Brian Simmons, the chief executive officer who replaced Le Norman that April. It described how he worked to improve Templar’s financial condition by selling 12 saltwater disposal wells to raise cash. He cut costs by replacing gas lift systems with lower-cost rod pumps, saving $750,000 a month.
Despite these initiatives, revenue and cash flows continued to decline and “it became clear that there was no scenario where recapitalizing the debtors’ business would be feasible absent a restructuring” its debts, the company summary said.
Creditors were asked for another round of concessions, but the talks ended with an agreement that “a sale of all or substantially all of their assets would be the most value-maximizing alternative.”
Templar is not unique in that. “We are seeing some of that also,” said Clark. When the value of the reserves drops below the value of the of loan, “bankers are less interested in being long-term holders than investors” who likely bought the note and bonds at a discount. The result is a bankruptcy where the plan is to “just sell what you have got,” he said.
By late last year, Templar had contacted 150 potential buyers and 41 had signed nondisclosure agreements allowing them to evaluate the assets in its online “data room.” Bids for all or parts of the company were due in March.