DALLAS—Banks are returning to energy finance—somewhat—as the industry slowly pulls out of the commodity price crash of 2015-2016. That’s not to say banks have returned to the pre-downturn status quo when crude oil prices were $100/barrel or better.
That’s the view of Haylee Edwards, vice president and relationship manager-energy finance, for East West Bank in Dallas.
“We see banks coming back to be more competitive,” she told a Petroleum Engineers Club of Dallas luncheon Sept. 8. “We’re getting phone calls again … we’re coming back.”
The tightness in lending that developed as commodity prices plunged occurred for a couple of reasons, she said. First, simply, was sound business practice by banks as their customers faced sharp drops in cash flow. Second, the U.S. Treasury’s Office of the Comptroller of the Currency (OCC) tightened its energy lending standards for banks, starting with its spring 2015 loan reviews.
"Prior to the downturn with a very open debt market (both public and private) there was a higher level of risk, credit risk” that understandably concerned the OCC when commodity prices quickly deescalated. It issued a new loan rules handbook at the time, Edwards said, which greatly limited debt options through governing Total Debt in leverage profiles where regulated banks were involved. This Total Debt definition now included all debt outstanding, unsecured or non-bank debt with longer maturities and perhaps no immediate principal reduction requirements. This guidance remains therefore while the unsecured and second lien marketplace perhaps is slowly on the mend, the leverage profiles of acquiring E&P firms are bettered, i.e. narrowed therefore the significant private capital support in M&A. These sponsored deals are leading marketplace expansion and supported by banks return to more traditional offerings, senior debt and in some limited cases second lien or an expanded tranche but still within regulator guidance. Also, hedging commodity price risk is a popular feature in new debt issuance and has equal support on the equity investment side in the so far post-recovery upstream transactions, an observation shared by Edwards
East West actively lends both to E&P and midstream firms, she explained, noting that “the midstream has been the least affected” by the price crash.
So what does a bank look at when it receives a loan application? Edwards ticked off several points that East West considers:
- First is management quality. Its executives must be experienced in the industry and aware of its challenges—as well as its opportunities;
- Is the technical team strong? It should have in-house, or consulting, geophysicists, landmen and engineers;
- The borrower should have good liquidity via borrowing availability or capital on balance sheet. Further, established and strong capital sponsorship from a family office or private equity provider is the current make-up of a good number of the debt deals closed since 2016; and
- The firm should have experience in the basin where it holds acreage—or an analogous play.
Also, the potential customer typically would have reserve reports from a recognized, independent reserve reporting service that set out proved developed producing, proved developed non-producing and proved but undeveloped reserves. Regular financial reports prepared by a professional accounting firm are another must, she said.
“We can refer them to same great equity shops or alternatives” if those standards can’t be met," Edwards said.
Paul Hart can be reached at email@example.com.