by Claire Poole  |  Published August 24, 2015 at 8:00 AM    thedeal.com

October is shaping up as a scary month for oil and gas explorers and producers, but their fright has nothing to do with ghosts or goblins.

Twice a year, banks that lend to oil and gas companies do what's called a "redetermination," which involves a formula that takes into account how much oil and gas the companies have, where oil and gas prices are expected to be and what they have hedged, and -- poof -- out spits how much they can borrow. During the last oil and gas price drop in 2008-09, banks reduced companies' borrowing bases by around 10% to 20% on average.

This time may be worse. Many companies won't have new proved reserves coming on line because they stopped drilling. Add that a lot of companies' hedges are starting to fall off and regulators are pressuring banks to fix their energy-related portfolios, and you have a recipe for disaster. "You have a convergence of factors that likely won't play out well for borrowers," said Will Bos, a corporate partner specializing in commercial lending and financial transactions at Kirkland & Ellis LLP in Houston.

Akin Gump Strauss Hauer & Feld LLP partners Tom McCaffrey and Sarah Schultz called the next redetermination period a potential "tipping point" for the industry as part of a midyear webinar for clients last month.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. said recently that banks will be less likely to "kick the can" again after last spring's redetermination season, which proved to be a nonevent. "We expect fall's redetermination to be more punitive than the spring's," they said. They expect banks' long-term price decks for oil could flip from a premium to a discount over strip prices given the duration of the downturn. "The wildcard in this equation is how banks will respond to the additional pressure reserve-based lending has been under by regulators during this cyclical trough," they said.

Borrowers, of course, can seek amendments and waivers. But observers think oil and gas companies will be limited in their ability to borrow, which will lead to reduced liquidity at a time when they really need it, given lower commodity prices.

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http://www.thedeal.com/content/energy/oil-and-gas-companies-brace-f...