American Oil and Gas Reporter - May 2021 - 37

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SpecialReport: Capital Sourcing
The average spring 2021 base case
for natural gas is $0.07 higher than the
banks' price decks from last fall, according to Haynes and Boone. " Although
an improvement, it is not so appreciably
better that it would indicate improvement
during this spring's borrowing base redetermination season for gas-weighted
producers. Actually, the banks' price
decks for gas prices track lower than
last fall's price decks were forecasting.
Until gas demand improves, it does not
appear that there will be any gas lift to
borrowing base redeterminations. "
In its borrowing base survey, released
about the same time, Haynes and Boone
further found that " after difficult borrowing-base redetermination seasons in
2020, producers should expect the spring
2021 redetermination season to result in
continued, or even very modestly improved, RBL credit availability. "
Hedging levels, which were already
historically high, have gone even higher,
the borrowing-base survey found. Price
improvements in recent months have motivated both producers and their lenders
to protect against the downside.
" The upstream oil and gas industry
has settled into a new normal with respect
to capital raising, " Haynes and Boone
states. " Expectations regarding capital
sources have stayed extremely consistent
in the past three redetermination surveys.
The most significant change is an increased
used of debt from capital markets. Three
oil and gas plays-the Permian, Eagle
Ford/Austin Chalk, and the Haynesville-
will attract the most capital during the
next two years. Though baseline economics are the biggest driver, the political
landscape is likely also a factor; plays
that involve significant federal leasing
have minimal interest. "
Figure 1 shows producer expectations
for capital sourcing options over the coming 12 months, according to results from
the survey. Cash flows generated from
operations was the most selected option,
followed by debt from capital markets,
debt from banks and debt from alternative
lending sources. Respondents could select
more than one option. A total of 444 responses were collected, according to
Haynes and Boone, with the percentages
representing the total responses for each
respective option.
Other financial outlooks strike a similar tone. The improvement in the U.S.
macro narrative has impacted the oil

markets, according to the most recent
ABN-Amro commodity review. " After
a few weeks of sideways trading, oil
prices rose based on lower U.S. crude
inventories and higher demand expectations. Both OPEC and the International
Energy Agency raised their demand expectations for 2021, especially for the
second half of the year. "
ABN-Amro noted that the changes
" come after OPEC+ decided to increase
its oil production in the months May, June
and July with a total of 1.15 million barrels
a day. Also, Saudi Arabia will unwind its
voluntary production cut of 1 MMbbl/d.
As a result, a total of 2.15 MMbbl/d will
be added to production by the end of July
to balance the rise in demand. "
According to the report, ABN-Amro
expects oil prices to trade around $60/bbl
for the remainder of the year, further refining that forecast to an average of
$62/bbl for Brent and $59/bbl for West
Texas Intermediate.
For natural gas, the cold spell in early
April triggered higher demand, which
has resulted in below-average inventories.
" The later end to winter weather will

mean it will take longer to restock gas
inventories, which will keep demand
higher than normal during the coming
weeks, " the ABN-Amro forecast said.
" As a result, we have lifted our natural
gas price forecasts for 2021. "
Reluctant To Lend
Even though semi-annual redeterminations were not harsh this spring, banks
are clearly reluctant to lend, even for
traditional reserve-based borrowing, observes Wesley Adams, director of acquisitions and divestiture firm Energy
Advisors Group. The redeterminations
were not severe, so banks seem to be
coaxing their existing borrowers along.
With public equity markets largely closed,
there remain a few options for operators.
" Those include friends, family offices,
and mezzanine finance groups, as well
as private equity groups and funds focused
on yield, " he says.
As bleak as the capital picture may
seem at present, bank lending is not lost
forever for independent producers. " Banks
will never go away because their capital
is cheap compared with the alternatives, "

FIGURE 1
Producer Expectations for Capital Sourcing Over Next 12 Months
Monetization
Transactions
(VPPs, ORIs, etc.)

Equity from
Capital Markets

Joint Ventures with
Private Equity Firms
(Farm-outs, Drillcos, etc.)

8%
8%

Cash Flow from
Operations

Debt from
Capital Markets

5%
14%

13%

24%

Debt from
Banks

12%
7%

9%
Debt from Alternative
Capital Providers

Equity from
Private Family
Offices

Equity from
Private Equity
Firms

Source: Haynes and Boone Spring 2021 Borrowing Base Redeterminations Survey

MAY 2021 37



American Oil and Gas Reporter - May 2021

Table of Contents for the Digital Edition of American Oil and Gas Reporter - May 2021

Contents
American Oil and Gas Reporter - May 2021 - Intro
American Oil and Gas Reporter - May 2021 - Cover1
American Oil and Gas Reporter - May 2021 - Cover2
American Oil and Gas Reporter - May 2021 - Contents
American Oil and Gas Reporter - May 2021 - 4
American Oil and Gas Reporter - May 2021 - 5
American Oil and Gas Reporter - May 2021 - 6
American Oil and Gas Reporter - May 2021 - 7
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American Oil and Gas Reporter - May 2021 - Cover3
American Oil and Gas Reporter - May 2021 - Cover4
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