Autumn pruning season for E&Ps

If the early indications of the autumn asset redeterminations for US oil and gas explorers are accurate, it looks like producers are finding ways to weather the 10-30pc value cuts . That is, unless oil prices fall further.

Banks determine the value of producers’ oil and natural gas reserves twice per year, partly based on average prices. Reserves are key assets for any upstream company, serving as collateral for loans or lines of credit. They are worth a lot less with crude prices around six-year lows. 

The asset value of top Bakken producer Whiting Petroleum, may fall by nearly 20pc to $3.8bn, chief executive James Volker says. But Whiting will still enjoy a cushion against its lending commitment. “Even with the new redetermination, I believe that we will maintain the $3.5bn commitment on our borrowing base from our group of banks, although we do not intend to use it,” Volker says.

US Gulf of Mexico-focused producer Energy XXI has reduced the value of its reserve base by 26pc compared with a year ago. Oasis Petroleum may face a 10pc reduction compared with now.

But with growing expectations for oil prices to hold lower for longer, squeezing cash flows and further widening the gap between what they earn and what they spend, producers are taking more steps to tighten their belts.

Concho Resources is selling shares to raise $712mn to clear its debt and keep some cash aside for possible future acquisitions. Its cash flow in the first six months of the year was $489mn, down more than 40pc from $855mn a year earlier. But total spending, including capex, rose to $1.28bn from $1.13bn in the same period, resulting in its net cash flow deficit widening to $795mn from $270mn a year earlier.

To improve its balance sheet, Chesapeake will cut 15pc of its workforce, lowering its headcount by 740 to around 4,000.  The reduction is “part of our continued efforts to address this pricing environment head on,” chief executive Doug Lawler said in an email to all employees.

American shale oil producers have so far been more resilient financially and more competitive with technology than many expected, Shell chief executive Ben van Beurden said at the Oil and Money Conference in London this week. But that there may yet be a limit to their abilities to get the cash they need.

“And with West Texas Intermediate (WTI) prices between $40 and $50 a barrel, they’ll possibly struggle to get it,” van Beurden said.

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