Path Forward: Borrowing Base Redeterminations In A Restructuring World

Opportune LLP Managing Director David Morris has his finger on the pulse of the oil and gas industry, which makes him uniquely qualified to assess the shifts in the industry as a response to the uncertainty surrounding the COVID-19 pandemic and its ripple effects on commodity price volatility, forcing many companies to file for bankruptcy or enter into restructuring arrangements.

Regarding the wave of bankruptcies in the industry this year, Morris says it boils down to a convergence of a variety of negative factors, some of which began before the pandemic.

“When I reflect upon it, the first things that come to mind for me are too much debt, too little hedging, price shocks, and demand depression and destruction. Those are certainly four factors that have been at play this year,” Morris says. “We knew going into this year that there were a lot of E&P companies that still had too much debt.”

The combination of too much debt and too little hedging, combined with the onset of the pandemic, which Morris says added insult to industry, resulted in a perfect storm for financial distress.

There’s also been a contraction in the number of lenders operating in the reserve-based lending, or RBL, space, a trend that Morris believes will continue unless there’s a drastic shift in the direction of the oil and gas industry.

Among those banks still committed to RBLs, Morris says there’s a movement for higher holds. In general, Morris also believes that banks will be more conservative in lending for quite a while, though he stops short of forecasting a permanent change brought on by the current downturn.

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