A Crude Kind of Credit Crunch

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Back in February, energy market watcher Platt's provided a rather scary preview of oil patch havoc to come. The focus of the article was on the likelihood of banks cutting energy companies' credit lines on the order of 20% to 30%. In several cases, that cautionary figure is now proving conservative.

I've already talked about a few firms singing the borrowin' base blues. As more April redeterminations roll in, the severity of the shrinkage is really starting to set in.

Perhaps you noticed that McMoRan Exploration (NYSE: MMR) took a dive today after reporting its first quarter earnings. Rather than any particularly negative operational information, I think it's pretty clear that investors are reacting to the dramatic 41% decline in McMoRan's borrowing base. Even the firm's warning in late March that a cut was coming didn't prepare people for this. I'm actually somewhat surprised at the violent sell-off today, given that McMoRan has nothing drawn on this credit facility.

Another stock getting whacked today is Quicksilver Resources (NYSE: KWK). Quicksilver, like Mariner Energy (NYSE: ME) and Concho Resources (NYSE: CXO) before it, has managed to maintain its borrowing base, but its lenders -- including JP Morgan Chase (NYSE: JPM) -- have similarly ratcheted up the interest rates. A provision I haven't noticed elsewhere is a new floor to the base borrowing rate of one-month LIBOR plus 1%. Quicksilver is pretty heavily drawn on its revolver, so unlike McMoRan, it will immediately feel the sting of these fees.

Other borrowing base redeterminations to watch out for over the next few weeks are those at Stone Energy (NYSE: SGY) -- whose Gulf of Mexico properties look vulnerable to banks' suddenly prudish price decks -- and Berry Petroleum (NYSE: BRY), which remains pretty heavily drawn on its revolver even after its recent property sale, and has already prepared investors for a hit to its liquidity. 

Leveraging up to buy that East Texas acreage around the market peak is really not looking so hot in the rearview mirror. The saving grace there, I suppose, is a puny capital expenditures program combined with very substantial oil hedges. Still, Berry's mostly just buying time, and that's not an enviable situation to be in.