Oil & Gas Journal - April 03, 2017

tions that are popular in downturns remain in reserve-based
lending, inclusive of commodity price hedge contracts on
material volumes and in longer durations. Further, anticash
hoarding clauses are still commonly included along with de-
posit account control agreements. Advances and risk factors
remain conservative on proved-undeveloped categories and
sometimes on proved developed nonproducing categories
where there is not a definitive drilling or recompletion pro-
gram under way or sufficient liquidity to support.”
She said, “Moreover, bank debt underwriting is focused
on liquidity and exploration companies largely living within
their cash flow. [Capital expenditure] funding is expected to
be supported with a narrower debt amount than before the
downturn, to be instead largely supported from reinvestment
of cash flow or equity investment. This means that the pace
of capex growth, and therefore the industry recovery, may be
limited to only as much as a firm’s cash flow-equity interest
supports it. Project economics must support attracting equity
investments in this new era or at a minimum produce favor-
able enough return to balance the current equity return ex-
pectations and a higher cost of noncommercial debt.”

Kitchens believes, however, that a rebound among the banks is taking place. “We are active and we are seeing an uptick with other banks as well. We see A&D continuing to escalate with smaller deals lifting the volume, all requiring more debt financing although more conservatively done than before the downturn,” she said, adding, “Further, there has been little refinancing so far in this recovery but we believe that refinancing will also begin to expand. Many debt facilities are nearing their maturities that launched prior to the downturn and the borrower’s financial situations have improved to support refinancing whether through a formal process or not. Most could refinance with minimal other resource needs—more equity, asset sales, added hedges, etc.—

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