The Spring 2024 Haynes and Boone borrowing base and price deck surveys revealed lenders are increasingly bullish on oil prices contrasted by a severe near-term slump in natural gas markets, and market players expect asset divestments driven by a recent wave of energy M&A activity to likely increase in 2025.
The Borrowing Base Redeterminations Survey, conducted with 92 energy lenders and borrowers, suggests a strong market for oil producers. Around 35 percent of respondents expect no change in borrowing bases in spring 2024 compared to fall 2023, but roughly 20 percent expect a 10 percent increase and 7 percent expect a 20 percent increase.
This modest optimism aligns with the Energy Bank Price Deck Survey, which includes responses from 26 energy banks and showed stable to slightly higher long-term oil price projections. Participants’ base case is now at $57.09 per barrel (WTI) by 2033 compared to $55.59 in the fall 2023 survey. The bump may be attributable to the recent confidence in the upstream business exemplified by the historical spree of consolidations among E&P companies over the last year.
"The oil market has newfound positivity, with borrowing base increases possible for some producers," said Energy Practice Group Partner Kraig Grahmann. "But we have a 'best of times, worst of times' split, with distress in natural gas markets countering the oil boom."
"There's a lot of divergence in how banks are projecting these prices going forward; it shows just how varied opinions are about where the market's headed,” Kim Mai, a partner in the firm’s Energy Practice Group added. "But with the largest players continuing to double down on oil and gas investments, there’s reason for hope.”
The natural gas market presents a more challenging picture. Historically low gas prices, which plunged below $1.75 per million Btu in March due to oversupply and a warm winter, are leading to concerns about borrowing base reductions. However, the spring price deck survey also anticipates a natural gas price rebound to $3.00/MMBtu by 2025, potentially driven by rising electricity demand fueled by AI expansion.
"We're seeing producers hedge a little less aggressively, which could be a nod to those rock-bottom natural gas prices," Mai said. "It shows they're nimble and can adjust their strategies as the market changes."
The recent wave of mergers and acquisitions is expected to trigger asset sales in 2025, according to the survey. Fifty-eight percent of respondents predict last year's M&A frenzy will spur non-core oil and gas asset sales starting in 2025 as firms divest of the properties to trim debt incurred to create M&A deals.
From capital sourcing to debt utilization, the survey reveals minor shifts in financing approaches. The borrowing base survey anticipates a meaningful drop in producers tapping public equity markets, offset by increased investments from private equity firms and family offices. Cash flow from operations remains the most popular source of funding for producers.