?Energy lenders’ fourth-quarter 2008 outlook for oil prices has fallen, according to a new survey of 48 commercial-capital providers. Their front-year oil-price expectations hold above the $70-per-barrel threshold to average $70.39, falling from their forecast of $76.64 in September 2008. Their front-month, average gas-price forecast fell to $6.81 per million Btu, down from $7.56.


The findings are according to global energy investment banker and M&A advisor Tristone Capital Inc.’s “Quarterly Energy Lender Price Survey” of regional, national and international oil and gas reserve-based lenders.
“The data provided for the fourth-quarter survey appear to show the participating banks still believe in fairly strong commodity prices,” the firm reports.


The lenders’ five-year trend shows a backwardated forward price deck for both oil and gas, with average 2012 forecasts of $61.98 for oil and $6.27 for gas. “Modest escalation of both oil and gas prices after 2012 is common, and prices are capped at an average of $62.98 and $6.06, respectively.”


The average discount rate used by participating banks is 9%. Operating costs on average are escalated 1% per year.


“For 2008 and 2009, the mean exceeded the median for both oil and gas. Therefore, it could be argued the outlier points that are closer to the Nymex strip prices are pulling the averages higher, and the median is a better representation of a typical lender’s price deck for these years.”


Using a 60/40 gas/oil weighting, the firm compared the average base case against Nymex futures as of October 24, 2008. The average base-case results were 109% of Nymex futures in 2008, gradually trending downward to 79% by 2012. Thus, banks are using an outlook that is close to what is observed in the market.


Quarter-to-quarter trends. Compared with the third-quarter 2008 survey, the lenders’ front-year oil-price forecast decreased 8%. Expectations for gas prices decreased 10% in the base-case price decks. For 2012, the lenders’ average oil-price forecasts are 1% higher while their gas-price expectations are 3% higher.


“Since starting the survey in second-quarter 2005, the participating banks’ oil and gas price decks have continually increased in the extended years from the previous-quarter results. This quarter has been the first exception.”


Sensitivity-case results. The fourth-quarter 2008 survey also includes a sensitivity case, which represents the lenders’ low or conservative price decks. Of the 48 participating banks, 39 provided a sensitivity case, which averaged a 22% discount to base-case lending policies for both oil and gas for 2008. The 2008 average sensitivity-case oil price is $55.17, for example, according the Tristone’s findings; for gas, $5.41.


Reserve-based lending scenario. Using current assumptions, the base-case price decks from the fourth-quarter 2008 survey were used to calculate a discounted cash flow using PV-9 from the bank average. With a 60% advance rate and 20% upside limitation, the amount loaned to a possible acquirer would be about $65 million, representing a sizable decrease from the third-quarter estimate of $90 million.


Using the same assumptions, but using the base-case price decks from fourth-quarter 2007, the amount loaned to a possible acquirer would be about $51 million. The increase in base-case pricing from fourth-quarter 2007 to fourth-quarter 2008 results in a 27% increase in the advance rate.


Tristone Capital is a global energy advisory firm that provides fully integrated investment banking, acquisitions and divestitures, and global equity-capital-markets services. Tristone employs more than 150 technical and financial professionals with offices in Houston, Calgary, Denver, London and Buenos Aires. For more information, contact Miles Redfield at 713-651-4229.

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