There had been a growing concern in the energy industry that the fall would be a really rough time for oil and gas producers. The concern stemmed from the fact that banks would be reviewing the credit lines they have extended to oil companies. The result of those reviews was expected to lead banks to pull back on the amount they'd be willing to lend out to companies, potentially leading to a credit crunch. That outcome, however, wasn't the one experienced by Oasis Petroleum (OAS +0.00%), which recently had its borrowing base left intact.
Still very liquid
After completing the semiannual redetermination of its borrowing base, Oasis Petroleum's lenders set its borrowing base at $1.525 billion. While that is slightly lower than the $1.7 billion borrowing base the company had prior to the redetermination, it still doesn't really change anything for the company as its elected commitments stood at $1.525 billion. In other words, the company's actual available liquidity is unchanged. Further, the company had only borrowed about 10% of its available capacity anyway, which we can see on the slide below, so it had a lot of breathing room.
Source: Oasis Petroleum investor presentation.
The end result of the company's fall redetermination process is that it locks in the company's liquidity through the end of next March when its banks will meet again to look at its borrowing base. This gives the company the confidence that it has ample liquidity for the next six months to fund its business even if oil prices materially weaken.
Not as bad as feared
What's surprising about this outcome is the fact that analysts feared that bank credit facilities would be heading much lower this fall. In a survey reported by Bloomberg, there was an expectation that 80% of oil companies would have their facilities redetermined lower with the average credit facility being cut by 39%. Such a cut would leave oil companies with much less financial flexibility at a time they needed it most. However, so far borrowing bases have only been cut by an average of 2% suggesting the redetermination worries have been much ado about nothing.
One company that had been bracing itself for a big cut was Oasis' Bakken Shale rival Whiting Petroleum (WLL +0.00%). It's CEO James Volker said that the company expected that its credit line would be reduced from $4.5 billion to $3.75 billion during the fall determination of its borrowing base. Having said that, it is worth noting that like Oasis Petroleum, not all of Whiting's borrowing base was currently available. We see this noted on the following slide, which shows that $1 billion of its total capacity is noted as additional borrowing base capacity.
Source: Whiting Petroleum investor presentation
In other words, even if its borrowing base fell as deep as Volker expected, it wouldn't actually impact the company's current liquidity. It's also worth pointing out that Whiting Petroleum really doesn't need its liquidity at the moment because its 2015 capital expenditures plan is fully funded with cash flow plus asset sales. Further, the company's projected 2016 capital plan is balanced between cash flow and capex at a $50 oil price. So, any borrowing base reduction wouldn't have had an impact on Whiting Petroleum's ability to fund its business.
That's something that we find at Oasis Petroleum as well; in fact, the company is actually generating a little bit of free cash flow at the moment. During the second quarter it generated $36 million in free cash flow and it projects to be free cash flow positive in the second half of this year and in 2016 even in the current oil price range. Because of this, the available capacity on its borrowing base is really only a security blanket at the moment given that it doesn't need that liquidity to fund its business.
Investor takeaway
While investors have been quite worried about the fall determination period, Oasis Petroleum passed that test with ease after its banks didn't touch its available borrowing capacity. Further, given that the company is generating free cash flow even after funding its business, it could have withstood a hit to its borrowing base. Still, having all its liquidity intact is a nice cushion to have during a time when oil price uncertainty still rules the day.
