Oas Investor Presentation

Image Source: Oasis Petroleum investor presentation

This oil crash has gone deeper and lasted longer than almost anyone would have imagined. Through the end of 2015, the banks that have lent money to oil producers had been very cooperative, often relaxing covenants and not drastically cutting credit lines.

In 2016, though, the banks seem to be taking a more aggressive stance. There's no bigger example than that then Whiting Petroleum's (NYSE: WLL) lenders, which cut the company's borrowing base by $1 billion at the end of March.

The question investors need to answer is what this big reduction in liquidity means for the struggling shale producer.

What exactly is going on here?
As of Dec. 31, Whiting had access to more liquidity than almost all of its peer group. It had roughly $2.7 billion of room between how much it had drawn ($800 million) and the approved limit on its revolving credit facility ($3.5 billion).

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Source: Whiting Petroleum April 2016 corporate presentation.

For an oil producer like Whiting, a revolving credit facility works like a home equity line of credit. For a home equity line, the bank will appraise the value of your house and allow you to borrow up to a certain percentage against it. How you spend that money is up to you. On a revolving credit line, the bank will have approved the oil producer to borrow up to a certain dollar amount as well. While the home equity line borrowing limit is set by the value of a house, a revolving credit line for an oil producer is set by the value of its oil and gas assets -- in both cases, the collateral.

When the value of the underlying collateral changes, so, too, will the amount that can be borrowed from the bank. If five years go by and your house is worth 20% more, the bank will increase the size of your home equity line. The same applies to the revolver of an oil producer, with one big difference.

The collateral value of the oil and gas assets changes much more rapidly, and in both directions. So the lenders to the oil and gas producers reassess that collateral value much more often than a bank does for a home equity loan.

After watching the value of Whiting's oil and gas reserves plummet along with the price of oil, the company's banking syndicate acted on its right to reduce the amount of the approved borrowing base.

A major redetermination, but not a major problem
The headline number of a $1 billion cut to the Whiting revolving credit facility sounds ominous. However, it doesn't really affect what the company is intending to do over the next 12 months.

Even after the $1 billion reduction, Whiting still has nearly $1.7 billion of available liquidity today. With Whiting and the entire industry now much more focused on living within cash flow, there isn't a desire to increase debt levels, either

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Source: Whiting Petroleum April 2016 corporate presentation.

With a capital budget of only $500 million in 2016, Whiting simply doesn't need to have nearly as much credit available.

Along with the reduction in the size of Whiting's borrowing base came some amendments to the financial covenants attached to the facility. The required secured debt-to-EBITAX ratio was raised from a range of 2.5 to 1.0 up to a range of 3.0 to 1.0. This should allow Whiting to get through the next two years without a covenant breach even if oil prices stay very low. Whiting is also now allowed to issue $1 billion of second-lien debt, which could be used to create even more room on that revolver.

How does Whiting's balance sheet stack up against its Bakken peers?
Like Whiting, fellow Bakken producer Oasis Petroleum (NYSE: OAS) is set up pretty well when it comes to both liquidity and debt maturities.  Oasis has a completely undrawn $1.15 billion credit facility (which was just reconfirmed) and no debt maturities before 2019.

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Source: Oasis Corporate Presentation

While the liquidity and debt maturity situations for both Whiting and Oasis are similar there is also the issue of how much leverage each company has relative to cash flows. Oasis carries $2.3 billion of debt against 2015 cash flow from operations of $359 million and current production of 51,000 boe/day.  Whiting meanwhile has $5.1 billion of debt against 2015 cash flow from operations of $1.05 billion and current production of 150,000 boe/day. So while Whiting has twice as much debt as Oasis, it has roughly three times the production and cash flow.

Continental Resources (NYSE: CLR) shares are also down considerably since 2014, but not quite as much as Whiting and Oasis. That would suggest that the market believes that Continental is on more secure financial footing.

A look at the numbers confirm this. Continental has $1.9 billion of liquidity available on a $2.75 billion revolving credit facility. Continental, like Oasis and Whiting, isn't facing any pressing near term maturities with only a manageable $500 million coming due in 2018.

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It is on a total debt to cash flow basis where Continental appears to be in better shape than the other two.  Oasis has debt to 2015 cash flow of 6.5 times and Whiting 4.8 times.  With $7.1 billion in debt and 2015 cash flow of $1.9 billion Continental is considerably lower at 3.7 times.  

While all three companies are in good shape on both the liquidity and debt maturity fronts, Continental's lower leverage makes it more appealing over the very long term.

Is Whiting attractive for investors today?
Whiting's share price has taken a major beating over the past 18 months. Adding $2 billion of debt to acquire Bakken rival Kodiak Oil & Gas late in 2014 stretched Whiting's balance sheet at exactly the wrong time.

For oil bulls, I think Whiting is a very sensible way to play an oil rebound. The company has ample liquidity and no significant debt maturities until 2019. If oil returns to a $70 level by some time in 2017, Whiting's shares are going to do very well.  If you aren't bullish, then there's no reason to own this company that is highly leveraged, both to oil and in general.

 

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