United States: Impact Of Fall Redeterminations


THE PROSPECT of long-term low oil prices looms large over domestic exploration and production companies. Prices have declined dramatically from the peak in June 2014 of $112 per barrel for Brent crude to the $30 to $40 per barrel range we are seeing today. While the number of oil and gas companies filing for bankruptcy over the past year numbers around 20, many more are in the process of hiring - or have recently hired - restructuring advisers. Others have been flagged by ratings agencies and analysts as over-leveraged, high-default risks.

Low commodity price levels continue (for what many increasingly believe will be a prolonged period) and favorable hedges started to roll off at the end of 2015 and continue to do so into 2016. It was against this background that the oil and gas industry, facing high degrees of uncertainty and varying levels of distress, entered into the fall redetermination season of 2015.


Drilling for oil and natural gas requires large amounts of capital. In a process referred to as reserve based lending (RBL), many small- and mid-cap E&P companies establish asset-based revolving lines of credit governed by a borrowing base tied to the present value of the company's proved oil and gas reserves with banks or a syndicate of banks to fund both drilling costs and working capital.

One-third of oil production in the lower 48 United States is produced by companies that have reserve-based loans. The reserve base for the loan is calculated by multiplying the volume of oil and gas in proved developed producing properties (PDPs) by a set price deck. Proved developed non-producing (PDNP) and proved undeveloped (PUD) properties are given some value in determining the reserve base as well but these properties can typically only account for 25% of the borrowing base. Borrowers are also given dollar-for dollar credit for their hedges.

To ensure the banks continue to be adequately secured during the term of the loan, lending documents usually require borrowing bases to be re-calculated twice per year, once in the spring and once in the fall. Historically, biannual redeterminations have not been major events for a company, with increases and decreases often attributable to recent acquisitions or divestitures by the borrower or significant increases or decreases in production since the last redetermination. With the decline in oil prices and hedges coming off now or shortly in the future, redeterminations are taking on increasing significance for both the banks and their borrowers.


Heading into the fall redeterminations, predictions of an industry credit crunch were not unfounded.

In October and not long after the first redeterminations were announced, Wells Fargo, the fourth-largest bank in the United States, announced that it had cut energy credit lines by 15%. E&P companies were primed for similar, if not more severe, results from the pending redeterminations with their respective lenders.

Furthermore, borrowing base reductions made during the spring redeterminations were much milder than expected. Prevailing thought was that banks had taken a "wait and see" mentality in round one of this year's redeterminations, but with fall approaching, hedges were beginning to roll off, and there was a more widely accepted realization that prices would remain lower over a longer period of time. In addition, the banks were expected to use a lower price deck during fall determinations, perhaps in part at the behest of government regulators.

The Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Company (FDIC) are taking a more active role in watching the reserve-based borrowing practices of the major banks. OCC officials met with major banks to discuss their lending practices. The early July meeting between the banks and regulators concerning the North American RBL market - the world's largest such market - was held in Houston, where the bulk of transactions comprising such market originate and are serviced by Houston-based bank teams.

Though government officials did not speak with any level of specificity about the discussions that occurred, the perception following the summit was that the agencies believe that reserve-based lending involves a high level of risk. Heading into fall redeterminations, companies feared that the increased governmental scrutiny had the potential to negatively impact borrowing base calculations and other reserve-based lending practices in the future.

However, predictions of large borrowing base reductions during the spring for the most part did not hold true: although the relatively lenient spring redeterminations led many analysts and industry insiders to worry banks would make significant reductions during this fall's redetermination season, oil and gas companies saw a mere 4% decrease in bank loans.

Instead of substantial reductions, many of the borrowers saw their borrowing bases reaffirmed or only moderately reduced.

A few borrowers saw much more dramatic decreases. Oasis Petroleum lost 10% of its borrowing base, SM Energy lost almost 17%, and Atlas Resource Partners LP had 6.7% shaved off of its previous borrowing base. The most dramatic reductions hit small E&P companies, which rely heavily on RBL facilities for financing the acquisition and development of their oil and gas reserves: Emerald Oil saw a 40% reduction to its borrowing base, while PostRock Energy Corp. experienced a $37 million decrease, a 48% reduction to its spring borrowing base.

Several others have had their spring borrowing bases reaffirmed, and the bulk of those companies experiencing increases did so as the result of asset acquisitions or changes to their lending facilities.


Despite analysts' expectations that RBL-related problems would emerge this past fall, short-term bank liquidity remained more stable than expected. Multiple factors may have played a part in softening the blow of fall redeterminations.

Many of the companies that had borrowing base increases or reaffirmations substantially increased production following spring redeterminations, thus increasing PDP values and offsetting the declining oil prices. In other cases, management restructured their hedges, taking gains from their current hedges and entering into new, lower-priced hedges for the coming year. Finally, some companies pledged additional collateral to compensate for the downward market forces, allowing them to maintain their existing borrowing bases.


Despite regulatory agency concerns regarding RBL, some suggested that banks might have shown flexibility this time around because government regulators were on edge, fearing any repeat of the 2008 financial crisis. However, with annualized prices rolling into weakness, producers will need to be vigilant to maintain stable liquidity.

In the next round of redeterminations, there is a widespread belief that the trend of including new or modified restrictive covenants in amended RBL agreements will continue. Analysts have already begun predicting that spring 2016 redeterminations could push liquidity lower on anticipated production decline. With producers' sharply reduced completion activity in recent weeks, oil production may be set to fall - and proved developed producing additions are unlikely to match organic declines. Even assuming no price deck changes in the banks' favor, without significant commodity price improvement, the spring 2016 redeterminations could be much tougher and may finally trigger the increased consolidation in the industry that has been long-anticipated by many.

Acknowledgement by the authors: Our colleagues David Reiner and Elizabeth Cromwell contributed to this article.

Originally published in Oil & Gas Financial Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions