Energy lenders may believe oil and gas prices have passed their peak, according to a survey of 44 of these commercial-capital providers. For front-month oil prices, their average price expectations fell from the $50-per-barrel threshold they cited in the fourth quarter. Also, their gas-price forecast fell slightly, from $6.33 per million Btu.

The results are according to global energy investment-banker and M&A advisor Tristone Capital Inc.'s eighth "Quarterly Energy Lender Price Survey" of regional, national and international reserve-based lenders. "Indications show certain lenders may believe prices have hit their high point and are settling below all-time highs," the firm reports.

The lenders' five-year outlook shows a backwardated forward price deck for both oil and gas, averaging $42.60 for oil and $5.55 for gas in 2011. "Modest escalation of both oil and gas prices after 2010 is common, but prices are capped at an average of $43.02 and $5.32."

Using a 60/40 blended gas/oil weighting, the firm compared the average "base case" against Nymex futures as of January 26, 2007. The average base-case results were 83% of Nymex futures in 2007, gradually trending downward to 74% by 2011.

Quarter-to-quarter trends. Compared with the fourth-quarter 2006 survey, the lenders' oil-price forecasts fell 4% for front-year pricing and gas fell 2% in the base-case price decks. By 2011, oil-price forecasts increase 3% while gas prices remain flat.

"Since starting the Tristone Capital Energy Lender Price Survey in second-quarter 2005, the participating banks' oil and gas price decks have increased 50% and 28%, respectively, based on 2007 pricing. During the same period, Nymex oil and gas prices have increased 13% and 7%, respectively."

Reserve-based lending scenario. Producers continue to have strong access to commercial debt, however. To show the impact of changes in lenders' base-case price decks in the past year, the firm analyzed a discounted cash flow model for a U.S. onshore property acquisition using general assumptions. The objective is to calculate the change in the advance-rate amounts (that is, lending funds) using a typical acquisition project.

The base-case price decks from the first-quarter 2007 survey were used to calculate a discounted cash flow (using PV-9, a bank average). With a 60% advance rate and 20% upside limitation, the amount loaned to a possible acquirer would be some $42 million. In first-quarter 2006, the amount loaned to a possible acquirer would be some $37 million, a 14% difference.

"It is interesting to note that strip pricing on January 3, 2006, had higher yearly averages for both oil and gas than the current strip, but lending amounts remain higher due to the energy lenders' belief in a higher price environment."

Canadian blowdown. Canadian independent consultants remain optimistic in their long-term view of prices. Applying a typical reserve-blowdown scenario using the different forecasted price decks (lenders' base case, Canadian independent consultants' projections and Nymex strips) to generate a net present value per unit of resource, oil continues to generate higher values than gas on an Mcfe basis, assuming 6:1 economic equivalency.

"Given their current price forecasts, the NPV based on the Canadian consultants' forecast has moved above the Nymex strip as the consultants remain optimistic on commodity prices relative to the market, particularly in near-term crude prices." The consultants surveyed are AJM Petroleum Consultants, GLJ Petroleum Consultants, McDaniel & Associates Consultants, Paddock Lindstrom & Associates and Sproule Associates.

"As we have rolled our blowdown assumptions one year forward into 2007, the various price decks generate lower per-unit NPVs-with a 60% gas weighting-versus the previous quarter across the board."

Participants. Lenders in the fourth-quarter survey include ABN Amro, Allied Irish Bank, Amegy Bank, American National Bank, AmSouth Bank, BancFirst, Bank of Montreal, Bank of Scotland, Bank of Texas, Bank of the West, BNP Paribas, Calyon-Americas, Capital One Bank, Citizen's Bank, Comerica Bank, Community National Bank, Compass Bank, Coppermark Bank, Deutsche Bank Securities Inc., DNB Nor, DZ Bank, Frost Bank, Guaranty Bank, HVB Group, Key Bank, Macquarie Bank Ltd., Mizuho Corporate Bank, Natexis Banques Populaires, National Bank of Canada, RBC Capital Markets, Regions Bank, Royal Bank of Scotland, Standard Bank Plc, Sterling Bank, TD Securities, Texas Capital Bank, Texas State Bank, Union Bank of California, US Bank, Wachovia Securities, Wells Fargo, Western National Bank, West Texas National Bank and Whitney National Bank.

Tristone Capital LP and affiliates have more than 40 E&P technical professionals in Houston, Calgary, Denver, London and Buenos Aires. For more information, contact Miles Redfield at 713-651-4229.

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