Corporate restructuring expert William Snyder tells Rigzone there is more pain ahead during the first two quarters of 2016.
As the fall sinks in and the energy industry feels the impact of a year’s worth of low commodity prices, Rigzone considers what lies ahead for those keeping the motors running. An expected weak borrowing base redetermination, consistently wide bid-ask spreads and extra crude rushing the market is complicating the end of the year. Rigzone talked with William Snyder, principal and national leader of the corporate restructuring group at Deloitte Transactions and Business Analytics LLP, for some expert perspective on what’s ahead.
Principal & National Leader of Corporate Restructuring, Deloitte Transactions and Business Analytics LLP
Rigzone: What are your expectations from the fall base borrowing redetermination?
Snyder: A recent survey from Haynes & Boone LLP showed that 76 percent of the companies surveyed expected their redeterminations would be lower. The issue is how much lower. The average has been 12 to 20 percent.
I think that is an issue, but the bigger issue is the lack of second lien and other money. The redetermination in April/May … [companies] got cut, too, but the banks worked with everybody and there was a plethora of second-lien money that came rushing into the market. I believe it was hundreds of billions of dollars that came in during that period and what I’m hearing now, from several banks, that’s not happening now.
If you went back a year ago, the general set-up was you had reserve-based lending with a bunch of unsecured bonds. Those bonds had very few covenants and very few restrictions with a rush of money into the market this year. And all the capital structures got way more complicated, and the bonds traded way down.
Rigzone: To what degree is reserve-based lending (RBL) driving how much money energy companies can access?
Snyder: The RBL is not what drives the entire loan package. The RBL, if you look at a lot of these companies, that piece of the debt may only be 10 percent of the debt. The bigger part of the debt relates to the bond debt behind it. The RBL does control a lot of the cash – the immediate cash – but the long-term cash for drilling and CAPEX (capital expenditures) comes from other sources generally. So the redetermination drop does hurt, but I think the bigger pain is going to be the lack of second lien and other money from alternative lending sources, from hedge funds and the like.
Rigzone: What about private equity? Haven’t those firms been raising billions of dollars, presumably to buy into energy?
Snyder: They’re just sitting on the sidelines. There’s $100 billion that’s been raised and it’s just sitting there, waiting for the thing to hit bottom.
And if you look at the companies that went to auction because of bankruptcies and were purely auctioned – toes up – to basically sell it. The outcomes were terrible.
Look at Dune Energy. Last December, Dune had over $1 billion reserves; it sold at auction for $19 million, and its senior debt was $67 million. BPZ Energy sold for $14.5 million, and it had $1 billion in reserves a year ago. ATP had $4.1 billion in reserves; it sold for $600 million. And American Eagle at one time $1.2 billion in reserves. It sold for $52 million.
The point I’m trying to make is there are three data points, and they’re not converging. One is the market, and that’s where it is today [aforementioned bankruptcies]; and then you have a bid and an ask, and they haven’t converged, so this money is just sitting on the sidelines. There hasn’t been a convergence of those three data points.
I think that’s going to change because liquidity is running out. So the redeterminations are being done; they are going down, but the lack of second lien and other alternative money is shrinking and going away. That’s what’s causing the rush on the market.
Because there’s no way an E&P (exploration and production) company can drill their way out on their RBL. The RBL is for working capital. But when you’re talking about CAPEX money, generally that comes from longer term money than an RBL. An RBL is a working capital line to handle daily working capital – they really need longer term money and that’s drying up.
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