Survey: Oil and Gas Price Expectations Bolster Bankers’ Confidence

Bankers are confident that oil and gas prices will remain at lofty levels in 2022, making it more likely that producers will be able to borrow, Haynes and Boone LLP said in its fall price deck survey.

“I’m more optimistic that prices will continue to stay high because I don’t see a lot of immediate rush to go out and overdrill and overspend for increased near-term productivity,” Buddy Clark, partner and co-chair of the Haynes and Boone energy practice group, told Hart Energy. OPEC-plus continues to be a wild card, but efforts by the Biden administration to tap into the Strategic Petroleum Reserve won’t alter the fundamentals of supply and demand, he said.

Fifteen banks participated in the survey, including such lenders as Wells Fargo & Co., Frost Bank, Amegy Bank and Japanese bank Sumitomo Mitsui Banking Corp. (SMBC Group). They provided price decks through 2031 to Haynes and Boone that will influence their oil and gas borrowing bases, which is the amount of credit a bank would be willing to extend to a producer. Each bank has its own proprietary method to determine its borrowing base, but price is a principal factor in making those calculations.

Bank price decks in the fall survey are almost 10% higher than they were during the COVID-19 crash.

“It’s kind of the starting yardstick that banks use to evaluate collateral to determine the borrowing base amount,” Clark said, “but clearly location, location to market, access to infrastructure, the basis for getting the production to a market—those are factors that go into the borrowing base determination.”

Value of a price deck

The banks align their expectations with the New York Mercantile Exchange (NYMEX) forward strip. Following the lead of commodities traders, the banks anticipate prices of both crude oil and natural gas to fall until 2025, then recover somewhat through 2031, the extent of the survey’s time frame.

The banks’ price deck is not necessarily a prediction of where prices will head, but is part of the underwriting equation that’s necessary to ensure their principle is repaid if a producer goes under. Because the NYMEX strip changes constantly, the banks watch it as they re-determine price tags on commodities on a semi-annual basis.

For example, the midday price of WTI on Nov. 22 was in the upper-$70s per barrel. The mean price of the banks surveyed has oil in the upper $50s in 2022. That could provide a path for a producer to impress a lender.

“If a bank’s price tag has $60 oil for next year, but the producers able to put in hedges for the next year at $80, they’re going to get a boost above the, call it a ‘plain vanilla’ borrowing base determination because the banks will take that into account,” Clark said. “The price tag is really just one of their ways to manage the one of the risks of repayment and price risk is a big one.”

The value of a price deck is that it is objective. It’s an apples-to-apples comparison and one that banks—at least some banks—are willing to share. It also hints at what the sector can expect from lenders.

“It’s a directional survey, if you will,” he said. “It’s certainly not a specific quantifiable dollar-for-dollar survey. But if we see that banks’ price decks are up 10% from the prior time or up 20%, then you can be pretty confident that borrowing bases are headed in that direction, as well.”

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Other factors

Of courses, surprises abound in the oil and gas sector. Clark said some recent strategic decisions owe more to political and social pressure than the economic fundamentals of the industry.

“I’m just shocked that some of the large majors are selling out of the Permian,” he said. “I think it’s a reaction to current political and social influences, not so much that [companies like Shell] have decided that oil will no longer be in demand five years from now. I don’t think anybody is predicting that so they’re selling off assets because they’re trying to improve their carbon footprint with respect to shareholders and activists.”