In today’s article, we will be covering a very hot topic in the E&P sector right now: liquidity. More specifically, how you can use Sentieo to quickly find out about a company’s credit facility as well as any restrictive indentures that might be out there limiting the amount of debt that a company can take on.
Most E&P companies are financed with some combination of equity and debt. Often times, these companies will supplement their equity and debt financing with revolving lines of credit that can come in two forms: asset-based or a more traditional facility based on earnings.
Asset based revolving lines of credit are tied to the present value of their proved reserves (reserves with a high degree of certainty that these resources can be extracted from the ground) and are typically assigned to non-investment grade companies since they do not have the creditworthiness to have a facility that is simply governed by earnings. The amount of borrowing capacity on these reserve based lending credit facilities is typically reassessed twice a year, once in the spring and once in fall.
Using Sentieo, you can quickly look back at Q2 ’15 E&P conference call transcripts and read what management teams were expecting regarding the fall borrowing base re-determination that just took place. You will also notice at the top that the number of hits within documents containing the phrase ‘fall re-determination’ became a topic of interest and spiked around the summer period:
It is too early to know exactly what will happen in the fall re-determination in October, but I expect it will come down.
Looking ahead to the fall re-determination, banks are still evaluating their price decks, but we do expect them to lower their price decks again in the fall.
While it is too early to know exactly what will happen in the fall re-determination, I expect our borrowing base may come down a bit.
Reductions turned out to not be as draconian as many predicted, but if oil prices remain depressed at current levels around $40-$50 per barrel, E&P companies may expect to see reductions in the upcoming spring re-determination which will reduce available liquidity.
Case Study: Oasis Petroleum Inc. (“Oasis”, NYSE: OAS)
On October 6, Oasis announced that its fall borrowing base re-determination had been completed with a new borrowing base set at $1.525BN, down from $1.75BN previously. While the borrowing base was cut nearly 10% from previous levels, it is important to note that the previous lender commitments of $1.525BN remained unchanged with no impact to liquidity.
With the entry of a few key words and a couple of clicks, Sentieo can quickly take you to the section in the latest 10Q discussing the type of credit facility (reserve based), change to the borrowing base, and total amounts outstanding:
Searching for covenants in filings, we can quickly tell that Oasis has several financial as well as non-financial covenants. Typical financial ratios governing E&P credit facilities typically include a leverage test (net debt to EBITDA, current ratio (current assets to current liabilities), and interest coverage ratio (EBITDA to interest expense).
Oasis also asked for an amendment from its bondholders for three out of four tranches of unsecured notes (holders of its 7.25% Senior Notes due 2019, 6.5% Senior Notes due 2021, and 6.875% Senior Notes due in 2023) to permit OAS to incur secured debt up to an amount greater than or equal to its existing credit facility.
The main provision in high yield indentures that control how much debt can be incurred is defined by the Adjusted Consolidated Net Tangible Assets (ACNTA), which is mainly based on the PV-10 value of proved reserves. The main idea behind the provision is that as your reserves grow (assets), so should the amount of debt that you are able to incur. The only problem this is that the PV-10 value of proved reserves for Oasis could be significantly lower at year end 2015 because the SEC will be using a backward average of commodity prices when calculating this number, which as we all know have taken a huge hit over the past year.
The notes seeking an amendment currently restrict borrowings under the credit facility to be the greater of either (a)200mm or (b) $100MM plus 25% of adjusted consolidated net tangible assets (ACNTA). If Oasis’s ACNTA were to come down and part (b) of the equation amount to a value less than Oasis’s current borrowing base of $1.525BN, then Oasis’s liquidity would be capped at a value less than the current borrowing base due to the indentures on these notes.
Given the lower commodity price environment, it is not surprising that Oasis looked to loosen some indentures that restricted the amount of debt they could incur, allowing them the flexibility to issue additional secured debt if the company anticipates their year end PV-10 value will take a hit and impact Adjusted Consolidated Net Tangible Assets (ACNTA)
Oasis later that month announced that the consent was successful, and the participating holders would be paid $10 for every $1000 in principal.
What other E&P companies might be out there with indentures that restrict debt capacity based on ACNTA?
A quick search query of the ACNTA acronym found in filings for companies within the energy sector quickly comes back with results from various documents that contain text related to an indenture limiting debt capacity. This specific type of indenture is typically buried within debt offering prospectuses, which can be hundreds of pages long.
Skimming the results, you can quickly find that other E&P companies such as Jones Energy (JONE), Linn Energy (LINE), and Halcon Resources (HK) have notes with indentures with a language similar to Oasis’s indenture that limits the incurrence of debt based on ACNTA:
By searching for filings that mention ACNTA, we’ve been able to quickly identify companies with restrictions on debt capacity based on ACNTA that may potentially cause borrowing capacity to be less than the actual amount of the credit facility once 2015 year end reserve estimates are revised using a much lower commodity price deck compared to a year ago.