?Energy lenders’ second-quarter 2008 outlook for oil prices has grown, according to a new survey of 45 commercial-capital providers. Their front-year oil-price expectations break the $60-per-barrel threshold, with average price expectations that grew from $59.86 in early March 2008 to an all-time high of $66.54 in this quarter. Their front-month gas-price forecast rose to $6.88 per million Btu, up from $6.44.
The results 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 reserve-based lenders.
“The data provided for the most recent survey appear to show the participating banks still believe in strong commodity prices. With oil and gas prices breaking record levels, we are seeing a big increase in the banks’ forecast,” Tristone reports.
The lenders’ five-year trend shows a backwardated forward price deck for both oil and gas, with average 2012 forecasts of $54.58 for oil and $5.98 for gas. “Modest escalation of both oil and gas prices after 2012 is common, and prices are capped at an average of $54.36 and $6.04, respectively.”
The average discount rate used by participating banks is 9%. Operating costs on average are escalated 1% per year.
“For all years, 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.”
Using a 60/40 blended gas/oil weighting, the firm compared the average base case against Nymex futures as of April 25, 2008. The average base-case results were 59% of Nymex futures in 2008, gradually trending downward to 57% by 2012. Thus, banks continue to use a significantly more conservative outlook than observed in the market.
Quarter-to-quarter trends. Compared with the first-quarter 2008 survey, the lenders’ oil-price forecasts increase significantly, by 11%, in front-year pricing. Expectations for gas prices increase 7% in the base-case price decks. By 2012, the lenders’ average oil-price forecast increases 10%, and their average gas-price forecast increases 2%.
“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,” Tristone reports.
Sensitivity-case results. The second-quarter 2008 survey also includes a sensitivity case, which represents the lenders’ low or conservative price decks. Of the 45 participating banks, 32 provided a sensitivity case, which averaged a 21% discount to base-case lending policies for both oil and gas for 2008. The 2008 average sensitivity-case oil price is $50.38, for example; for gas, $5.28.
Reserve-based lending scenario. Using current assumptions, the base-case price decks from the second-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 $78 million, representing a significant increase from last year.
Using the same assumptions, but using the base-case price decks from second-quarter 2007, the amount loaned to a possible acquirer would be about $67 million. The increase in base-case pricing from second-quarter 2007 to second-quarter 2008 results in a 17% increase in advance amounts.
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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