The impact of reserve base lending on shale producers

By Staff | May 09, 2017

A new report from Columbia University examines the link—and impact—between interest rates and the financial health of mid-sized shale exploration and production companies. The report, “Reserve Base Lending and the Outlook for Shale Oil and Gas Finance,” provides a great history lesson and refresher on how and why many mid-sized and smaller production companies could ramp up production and operations starting in 2005. The report also details how low oil prices impacted many smaller firms, starting in 2014. Today, with interest rates potentially rising, the report’s author points out that some firms may be approaching another difficult time as the ability to borrow money may soon get to be more expensive.

As you’ll see from reading the report, shale operators need high volumes of capital to develop their resources. To attain that funding, many rely on reserve base lending—a form of bank lending that is based on the amount of oil and gas reserves a company has.

As explained in the report: RBL structure is a bank-syndicated revolver credit facility secured by the company’s proved oil and gas reserves. Oil and gas reserves are classified into three categories: proved reserves, probable reserves, and possible reserves. Bank lenders only extend credit against a company’s proved reserves. As the collateral is oil and gas reserves of the company, RBL financing requires engagement of an independent reserve and production engineer to support the bank’s calculations in determining the borrowing base, which is the maximum credit that could be made available to the borrower by a lender, calculated based on the company’s reserves.

Because shale operators are linked to RBL financing, they are also impacted by interest rates for those loans. Check out the report to see what the author has to say about the negative impact of rising rates for small- to mid-size operators.The report