The process is unique to energy companies and related businesses, like oilfield service providers, because of their vulnerability to big swings in the price of commodities. And when the price of crude falls—as it has, nearly 47 percent, since last June in the benchmark West Texas Intermediate market—that lending base is immediately affected.
Energy-industry financing veterans say that when redetermination season looks likely to result in the reduction of available bank financing, the timing of raising new capital becomes key. That's because investors prefer companies that are able to raise additional cash before bank lenders shrink their contributions to the balance sheet—not after.
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"The whole picture that's taken place in the energy sector right now is really two stories: of the haves, and the have-nots," said Oleg Melentyev, a credit strategist at Deutsche Bank, in a telephone interview. "There are stronger issuers who have seen … weaker names lose access to the market, and are wasting no time proving to investors that they are the stronger names, they are survivors, and they do so by raising capital."
Other energy companies, he said, "are just basically sitting there and waiting for whatever comes their way."
The amount of cash or access to it on a driller's balance sheet, Melentyev added, "will determine whether you make it through the next three months, six months or 12 months."
And after a volatile week in which WTI prices hit recent highs, only to snap back briefly before rebounding to the $57 range again late Thursday, where the commodity is headed six months from now is anyone's guess.
A bumper-crop of stock and bond issuance across a range of companies shows that companies are grabbing cash while they can.
During the first quarter of the year, exploration and development companies raised $7.8 billion through new equity share offerings, according to Dealogic, with entities such as Noble Energy and Whiting Petroleum topping that list. In the public debt markets, another $9.1 billion was raised that quarter, which, while not a record, marked a solid period for energy bond issuance during this troubled time. And during the first two weeks of April, an additional 14 deals have occurred, with some pricing earlier this week.
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Amid the activity, major U.S. banks are acknowledging the growing weakness in the energy sector.
In announcing their own quarterly earnings results this week, officials at Citigroup and JPMorgan Chase said they had set aside roughly $100 million apiece specifically for potential losses in the oil and gas sector; without breaking out specific dollar amounts, Wells Fargo and Bank of America said that they were planning for potential defaults, as well.
"Our total exposure to various energy companies has come down," said John Gerspach, Citigroup's chief financial officer, during a call with reporters on Thursday. Part of that was due to the semi-annual redeterminations process, and part of that was motivated by a more proactive pullback by the bank, he noted.
A day before Energy XXI's bond issuance, the Texas and Louisiana oil and gas driller Comstock Resources was also in the market, raising $700 million in new debt. Comstock planned to use the deal's proceeds to retire the credit facility it then had through the Bank of Montreal, Bank of America, and other lenders, as well as to create an insurance policy against a continued slump in oil.
"We were worried about, potentially with our spring redetermination, losing a little bit of our credit facility," recalled Gary Guyton, the company's director of planning and investor relations, who said in a telephone interview that internal estimates suggested that Comstock would lose 10 to 15 percent of the $675 million borrowing base it then had.
It was the expected September redetermination process, in which Comstock risked losing an additional chunk of its access to capital if cheap crude and gas prices persisted, that had executives more worried. "There [are] just huge uncertainties," Guyton said. "Oil could be $75 by the time fall rolls around. It could be $45."
And if the hedges that companies currently have in place to preserve relatively high prices for the oil they sell begin to expire, the environment this fall could prove even more challenging, say company executives and other industry insiders.
Still, JPMorgan chief financial officer Marianne Lake, while noting the current stress in the oil patch, sounded a note of optimism in a Tuesday call with reporters. Despite the $100 million in oil-and-gas loss reserves and "some contraction" in the bank's energy exposure during the first quarter, she said, those moves won't necessarily "translate into realized losses."
"Clients aren't sitting on their hands," Lake added. "They're actually out trying to resolve liquidity."