The largest bank lenders to the oil and gas sector are marking down their expectations in a move expected to put additional financial stress on struggling producers.
According to more than a dozen sources familiar with the transaction, major banks including JPMorgan Chase, Wells Fargo and Royal Bank of Canada have reduced their approximate prices of oil and gas firms' assets as part of regular bi-annual reviews.
While the scale of the RBL sector remains uncertain, a few hundred businesses are estimated to take out such loans, with the total amount in the billions of dollars.
The perceived value for both oil and natural gas for the next five years has been marked down by these lenders, with changes kicking in as early as this month.
Expected costs for natural gas have been lowered by about $0.50 per million British thermal units, about 20 percent below the market's spring rate.
Industry sources expect that some companies are confronted with a decrease in loan volume of 15 to 30 percent. It is estimated that oil prices will be about $1 to $2 less than spring forecasts.
"Many banks feel that they are too vulnerable to oil and want to reduce some of this threat," said Ian Rainbolt, Vice President of Finance at Warwick Oil, a private equity firm with upstream interests in Oklahoma and Texas.
This is a threat to smaller companies that are already struggling to find other financing methods, such as issuing stocks or bonds, as investors are growing restless with years of poor returns in the shale sector, even as the United States has risen to become the world's largest producer of oil and gas.
Reduced funding could slow growth in US oil and gas production, as well as risk further sector bankruptcies.
According to law firm Haynes and Boone, restructuring lawsuits by American oil and gas companies have not been seen since 2016, when the country's shale plunged to $26 a barrel.
Industries that are heavily focused on exploration for natural gas may be the most at risk.
Banks projected costs for natural gas for the next 12 months ranging from $2 to $2.35 a million British thermal units and up to $2.50 at the end of the five-year period, both smaller than in the summer.
Smaller RBLs can have enormous consequences on the market: Alta Mesa Resources, an Oklahoma-focused company headed by former Anadarko Petroleum chairman Jim Hackett, filed for bankruptcy a month after nearly 50 percent of its lending base was trimmed down in mid-August.
Meanwhile, oil and natural gas output in federal waters produced government revenue of about $90 billion from 2006 to 2018.
The Ocean Energy Management Bureau (BOEM) leases exploration rights to companies and sets production royalty rates, and the report shows that underestimates have resulted in the government collecting hundreds of millions of dollars less than it could otherwise.
