Back in 2012, BNP Paribas exited the North American reserve-based lending market, when it sold its RBL unit to Wells in an effort to shore up its balance sheet amid the turmoil generated by the eurozone debt crisis.
A little over two years later, in the fall of 2014, BNP got back into the RBL game in the US. That probably wasn’t a good idea.
Just a few months after the bank jumped back in, the Saudis moved to bankrupt the US shale complex and it’s been all downhill from there with crude plunging and America’s cash flow negative producers careening towards insolvency.
We’ve been warning since early last year that it was just a matter of time before banks start to shrink the borrowing bases of uneconomic producers’ credit facilities. In other words, with the door to the HY market now slammed shut as spreads blow out and investors panic, the last lifeline for many in the O&G space is about to be cut, as no bank wants to be caught flat-footed if things get as bad as many people think they will.
On Thursday, we learn that BNP is now set to exit the RBL market for the second time in five years.
“BNP Paribas is reining back lending to the US energy sector, potentially tightening a squeeze for cash-strapped producers struggling with the collapse in oil prices,” FT reports. “The Paris-based bank is pulling out of the business of reserve-based lending, a vital source of liquidity for many oil and gas companies with big capital needs and irregular cash flows.”
“Given the current environment in the oil and gas market and the poor outlook for future fundamentals in the short to medium term, BNP Paribas has had to make adjustments to some of its businesses and has decided to stop the redevelopment of its reserve-based lending business,” the bank said, in a statement.
BNP will continue to service existing clients, but its exit from new business is a rather inauspicious move. Indeed, it suggests that when credit lines are reassessed again in April, we’re likely to see further cuts. “During the previous round of ‘redeterminations’ last autumn, banks cut limits for most customers between 10 and 20 per cent,” FT continues. That’s likely to be the case again in two months, Wells CFO John Shrewsberry said this week at an industry conference in Florida.
As a reminder, virtually the entire sector is cash flow negative. Without access to credit lines, everyone goes belly up. Of course with crude at $27, no one wants the assets the companies have pledged as collateral. As we outlined three weeks ago, some oil and gas drillers’ assets are only fetching a fraction of what they owe at auction.
Amusingly, banks are cutting their own throats by shrinking the credit facilities. That is, you don’t necessarily want to bankrupt someone who owes you a lot of money, especially when you won’t be able to recover much by selling off the collateral.
But alas, there’s really no choice at this juncture. There’s no end in sight to the oil market malaise with Iran ramping up production and a recalcitrant Saudi Arabia dug in for a long war of attrition.
We anxiously await the next bank to pull the RBL plug and we’re even more anxious to find out just how much the banks have provisioned for the losses that are sure to pile up rapidly once the entire sector loses access to its revolvers.
As a reminder, America’s long list of cash flow negative producers are sitting on $325 billion in debt.
via Zero Hedge http://ift.tt/1PFusH6 Tyler Durden