Wednesday, March 11, 2009

Small E&P Companies Singing The Liquidity Blues

Yesterday, smallish Pennsylvania-based E&P company Penn Virginia (PVA) provided a financial liquidity update hoping to sway investor concerns arising from an increasingly cloudier liquidity picture. Judging by today's stock action, the company failed. The biggest threat to PVA and comparable companies, is the ongoing reduction in borrowing bases on credit facilities by lender banks which are reevaluating the value of E&P's collateral in light of the crash in commodity prices. CEO James Dearlove had some more to share on this issue:
"We understand the financial community’s concern regarding liquidity in general and in the exploration and production industry in particular and, therefore, believe this update regarding our revolving credit facility is appropriate. The recommended new borrowing base is in line with our expectations in light of the weak commodity price environment, offset with the 35 percent increase in our proved reserves from 680 Bcfe (billion cubic feet of natural gas equivalent) at year-end 2007 to 916 Bcfe at year-end 2008. We expect our borrowing base reduction will be far less severe than what has been or will be experienced by others in the industry."
Unfortunately for PVA this statement seems to have only heightened the "financial community's concern regarding liquidity in general." Also, it is not very politic to throw one's competitors under the liquidity truck the way Jimmy did. At least he did not mention specific names...

Another issue that that the financial community is very concerned with is at what levels have comparable companies hedged their commodity exposure. As the airline sector showed vividly, the drop in oil after hedging to the upside resulted in huge collateral calls which lead to significant outlfows in cash. The saving grace was the bloated cash line item in most airlines' balance sheets. The smallish E&P sector however does not have that luxury, especially when companies rely on revolver to fund day to day cash needs. If oil persists at current depressed prices it is likely that secured lenders will get more and more hostile with companies in an attempt to ensure their collateral pool is not wasted away in parallel with the price of oil. Sphere: Related Content
Print this post


Ian said...

The small E&P guys are on the other side of the trade from the airlines. Most have locked in 2009 and 2010 production at prices far higher than current, and are therefore in the money.