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Oil industry may see cash tighten as banks face pressure

U.S. oil and gas companies have been hammered by collapsing crude prices, and now the banks that provide their lifeblood are under pressure to curb their lending to them.

This month, the energy industry has entered a regular, twice-annual review period that will determine whether banks reduce their access to credit. The current period comes at a time when only the healthiest drillers are able to tap equity and bond markets.

Banks and syndicates of lenders typically extend loans to drillers in the form of a revolving line of credit. That is the go-to financing option for day-to-day expenses. When exploration and production firms need more funding, they typically take out a second lien loan or issue new equity or bonds.

Those credit lines are tied to the value of drillers' proved oil and gas reserves. Since those asset values fluctuate with commodity prices, banks re-evaluate their energy customers' creditworthiness twice a year in a process the industry calls the borrowing base redetermination.

On average, lenders, borrowers and other stakeholders expect a 38 percent decrease in borrowing bases, according to a survey by Houston-based law firm Haynes and Boone.

With U.S. crude futures down 62 percent from their 2014 high, the best most drillers can hope for is to have their existing borrowing ability left intact. In the worst-case scenario, the borrowing ceiling is slashed below the outstanding balance, and the company can't make interest payments, triggering bond covenants that lead to bankruptcy.

Redeterminations were "pretty benign" last year as lenders mostly remained accommodating, said Andrew Brett, a real assets research consultant at investment consulting firm NEPC. But banks now face internal issues as the assets that back energy loans look more distressed, he said.

Banks have been increasing their provisions for bad loans...