IN PICTURES: Eight Ways To Survive A Market Downturn
Covenant Concerns
Some investors have been worried that if the world economy continues to contract, and commodity prices fall below recent support levels, a number of exploration and production companies may break their covenants in bond indentures or credit agreements. These are considered technical covenant breaches and don't mean the companies failed to make their required payments. However, they do give leverage to the bank lender to amend the agreement or even demand immediate payment. Aggressive bondholders can also demand a cash payment in lieu of pushing the company into default.
Credit Flowing Again
Cabot Oil and Gas (NYSE:COG) just announced a new credit line with its lenders, and the company now has a $500 million unsecured credit line with a three-year term. Its borrowing base is now $1.35 billion, and the company's available credit is at $450 million.
Twice a year, Range Resources (NYSE:RRC) has to reaffirm its borrowing base with its lenders. The company said its banks agreed to keep the base at $1.5 billion. At the end of 2008, Range only had $693 million outstanding on the facility.
Cimarex Energy (NYSE:XEC) entered into a new credit line agreement with its bank group, increasing its line from $500 million to $800 million. The company only had borrowings of $345 million under the credit line as of March 31.
On The Flip Side
Sometimes banks don't agree to reaffirm for a borrower. TXCO Resources (Nasdaq:TXCO) received an acceleration notice from its lenders demanding immediate repayment of $50 million that was outstanding on its $150 million credit facility (as of March 31). In addition, banks sometimes extract more advantageous conditions from their borrowers in return for an affirmation. Quicksilver Resources (NYSE:KWK) announced several weeks ago that its bank lenders affirmed its borrowing base on its credit facility of $1.2 billion, with maturity in 2012. As a condition of this new affirmation, Quicksilver agreed to pay higher interest rates on the amount drawn.
Bottom Line
Exploration and production companies are especially vulnerable to credit availability because of the large amount of capital expenditures the industry must reinvest into developing its oil and gas properties. Unlike the integrated oil companies, they don't have other less cyclical segments, like refining and marketing or chemicals, to fall back on for earnings when commodity prices fall. However, the credit panic in the oil patch seems to be abating as evidenced by recent announcements from several exploration and production companies. Restrictions in credit and capital have accelerated the large drop in drilling in North America during the current cycle, and it is a relief for investors to see this problem start to recede.
