Will The Oil Price Slide Lead To A Credit Crunch For U.S. Drillers?
The recent drop in oil prices, which has almost wiped out the price gains since OPEC announced its supply-cut deal, is coming just ahead of the spring season when banks are reassessing the credit lines they are extending to support drillers’ growth plans.
WTI front-month futures have been trading below $50 a barrel for a couple of weeks, while Brent crude slipped briefly below $50 on March 22, dropping below that psychological threshold for the first time since November 30, the day on which OPEC said it agreed to curtail collective oil production in an effort to rebalance the market and lift prices.
Lenders review the oil and gas companies’ creditworthiness twice a year, in April and in October, in the so-called borrowing base redetermination. The recent drop in the price of oil may prompt banks to be more cautious in their assessments, but still, things look brighter for oil firms than they did in March last year when oil prices were consistently below $40 a barrel.
This time around, analysts expect reductions in credit lines should oil prices drop below $45 until creditworthiness reviews are over, according to Bloomberg.
These assessments are closely connected to the price of oil, given the fact that the value of the companies’ oil and gas reserves serve as the basis for their creditworthiness assumptions.
Nonetheless, reviews are less likely to lead to drastic credit cuts this spring because the companies that have survived the oil price crash have emerged leaner after major cost cuts, asset sales, and focus shifting to easier, cheaper, and more lucrative areas, such as the Permian. U.S. shale players have been locking in future production, and the best drilling areas are now estimated to be profitable at as low a price as $40 per barrel.
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