After an abrupt slowdown during the recession years that peaked in 2009 but continued to linger for some time after, billions of dollars are again flowing into upstream shale development and midstream infrastructure as well as certain other low-risk projects. The credit crunch is mercifully over and that loud sound you hear is the industry booming again. This is just what the petroleum industry needs to continue its effort to make the United States less reliant on foreign energy sources.
A capital-intensive industry like oil and gas cannot thrive without the funding needed to acquire reserves; to drill and grow organically; to participate in mergers, acquisitions, and joint ventures; and even to meet payroll. When capital dries up as it did when the economy tanked, exploration activity slowed dramatically, especially for independent E&P companies, many of which relied on credit facilities to continue their drilling program even as prices fall with declining demand.
According to Rystad Energy, E&P companies spent around US$105 billion on drilling and completion in shale plays alone in 2013. This was more than double the $45 billion spent in 2010, as the US began to emerge from the recession.
As far as the midstream sector is concerned, Capital One's Scott Joyce recently told OGFJ that midstream companies will continue to finance their growth with bank debt as well as public and private debt equity. "Companies with solid management teams, good assets, and appropriate contract structures should have very good access to capital over the next several years."
The content we've chosen for this Energy Banking section is part of a series we're running on reserve-based finance (RBF), which is a form of lending that is attracting considerable attention, judging from the inquiries we're getting. The article was written by Kevin Price of Societe Generale and Jason Fox and Dewey Gonsoulin of Bracewell & Giuliani. This installment examines debt sizing and cover ratios, loan facility covenant packages, hedging, default, and the future of RBF. We hope you find it of value.
Good reading!
