Reserve Base Lending and the Outlook for Shale Oil and Gas Finance

Reserve Base Lending and the Outlook for Shale Oil and Gas Finance

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Amir Azar assesses the general outlook for U.S. shale oil and gas in a higher-interest-rate environment by examining North American exploration and production (E&P) companies from a compiled financial perspective, with a focus on the impact of the collapse of oil prices to below $50 per barrel.

The report begins with analysis of debt and leverage ratios as they climbed between 2005 and 2015, driven by ongoing cashflow deficits and low interest rates. Azar then discusses the impact of the 2014 oil crash on corporate reserves and balance sheets, followed by the role of the Reserve Base Lending (RBL) structure in creating a structural platform for the growth of small and midsize oil producers. It discusses borrowing-base calculations and analyzes the strengths and weaknesses of various RBL structures.

In short, the report concludes that the oil downturn has put substantial pressure on many non-investment-grade North American E&Ps. While operational efficiencies have lowered cash costs, a hasty rise of interest rates to the pre–financial crisis level would pose a challenge to funding future drilling and production during a low oil price environment, particularly for small and midsize companies due to the capital-intensive nature of shale.