Jan 18 - Standard & Poor's Ratings Services today published an article
titled, "Despite Risks, We Expect Excellent Recovery On Most Reserve-Based
Lending Facilities Of E&P Companies," which highlights the excellent historical
recovery rates of reserve-based lending (RBL) facilities used by oil and gas
exploration and production (E&P) companies and that Standard & Poor's believes
they will continue.
Standard & Poor's rates more than 60 U.S. speculative-grade ('BB+' and lower)
E&P companies, and nearly all of them use RBL facilities as a source of
funding. RBL's are revolving credit facilities, allowing companies to borrow
and repay amounts as needed. A borrowing base mechanism determines an RBL's
borrowing capacity, and the borrowers' hydrocarbon (oil, natural gas)
reserves, which are typically their primary asset, secure the loans.
"We believe the terms and conditions in the facilities including the
first-priority lien, overcollateralization of the borrowing base, the
unilateral discretion lenders have in adjusting the borrowing base, and the
presence of financial maintenance covenants are important factors behind this
excellent track record," said Standard & Poor's credit analyst David A.
Kaplan. He also went on to say that, "Although we expect RBLs to continue to
achieve full recovery in most instances, the potential for less than full
recovery exists due to a variety of risks." These include the collateral value
being subject to the volatility of commodity prices, the inherent uncertainty
in reserve estimates, and evolving market dynamics which we believe could lead
to longer and/or deeper industry downturns in the future.
The article goes on to examine risks to the excellent track record of full
recovery of RBL facilities such as sensitivity reserve values have to
fluctuating hydrocarbon prices; the limited frequency of reserve
reassessments; and risks involved in estimating the reserves, despite
The report is available to subscribers of RatingsDirect on the Global Credit
Portal at www.globalcreditportal.com. If you are not a RatingsDirect
subscriber, you may purchase a copy of the report by calling (1) 212-438-7280
or sending an e-mail to firstname.lastname@example.org. Ratings
information can also be found on Standard & Poor's public Web site by using
the Ratings search box located in the left column at www.standardandpoors.com.