Sizing and structuring matter in reserves-based oil and gas
17 12 2012
Despite difficult market conditions, reserves-based lending has reached its zenith in terms of liquidity and deal size. Banks have lent to oil and gas producers against oil reserves in the ground for over 30 years. The pioneers were small exploration and production firms in the US Midwest. Now bigger, bolder borrowers dominate the market, exemplified in recent, oversubscribed deals like Tullow Oils $3.5 billion loan and Swedish independent Lundins $2.5 billion borrowing base.
But reserves-based lending isnt just getting bigger. Banks are applying structures to unconventional assets at the smaller end of the spectrum, and are prepared to look at more challenging jurisdictions. Recent examples include Glencores $600 million seven-year loan for its Equatorial Guinea operations, the trading companys first RBL, financings, some with export credit agency support, for shale gas developments in the US, and even coal bed methane extraction in China. Reserves-based lending has grown up, serving new clients on new assets in riskier jurisdictions than ever before.
The allure of RBL
One explanation for the rude health of the market, split between London and Houston, is the growing number of independent exploration and production companies moving into new regions. Unlike oil majors, these younger producers lack capacious balance sheets, so their best option is the structured debt market. Borrowers like revolving reserves-based facilities because they give them flexibility in implementing spending plans, and portfolio deals allow them to add or remove borrowing base assets.
As these juniors grow, lenders know that frequent refinancings bring repeat business and...
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