January 18, 2013 / 3:56 PM / in 5 years

TEXT-S&P expects continued excellent recovery on E&P RBL facilities

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 
technological advances.

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 research_request@standardandpoors.com. 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.
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