Insight: A credit crunch sequel for bruised natural gas companies

Wed Apr 25, 2012 12:53pm EDT
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By Edward McAllister

NEW YORK (Reuters) - For U.S. natural gas producers, it's the credit crisis all over again.

As prices of the fuel tumble to their lowest in ten years, big lenders are set to slash credit lines to the most exposed producers by as much as a quarter, forcing firms to conserve cash by cutting back on drilling plans or to sell assets.

As part of a twice-yearly process of reassessing more than $60 billion dollars in loans to the energy sector, bankers are already telling some mid-sized outfits like Penn Virginia Corp PVA.N and Carrizo Oil and Gas (CRZO.O: Quote) to expect some of the biggest cuts since the financial crisis in 2008, according to interviews with more than a dozen lenders and producers.

"It could get nasty out there," said one loan manager involved in the bi-annual "redeterminations" process during which banks consider how much capital they will extend to energy companies based on forward commodity prices, a company's production outlook and its hedging program.

The current round of lending curbs, due to be completed within the next few weeks, may not cut so deep at companies that can pivot away from gas production and drill for more lucrative oil, which is trading at a record high relative to gas. And others have tapped less than half their credit lines, leaving some cushion to absorb a reduction without distress.

There are also large debt-laden companies like Chesapeake Energy (CHK.N: Quote) that tend to rely more on longer term debt by borrowing through the bond market, giving them some protection from the bank credit process.

But redeterminations can provide -- or choke off -- the life blood of smaller companies. If the surge in shale gas production continues to depress prices six months from now, an even more painful round of curbs could follow for companies that produce mainly natural gas or whose production is largely unhedged.

"You could see some companies that have their liquidity stressed and if these price conditions continue you could see it in the fall as well," said Marc Cuendo, an executive vice president at Wells Fargo who is involved in such loan decisions.   Continued...