While spring is typically a time for optimism and new beginnings, many energy investors had an ominous feeling this spring. That's because the sector's banks would be reviewing the credit they had extended to producers and were expected to be very stringent given the significant deterioration in oil and gas prices since banks last reviewed credit in the fall. There was a grave concern that banks would be so stringent that it could lead to a mass casualty event with a number of producers being forced into bankruptcy.
Those concerns, however, haven't been realized after banks have been far more lenient than expected, at least with Chesapeake Energy (NYSE:CHK). That's after they reaffirmed the company's $4 billion credit line and agreed not to review it again until June 2017. That provides the company with clear visibility on liquidity for more than a year, which is a huge relief given the company's grave credit concerns.
Clarity on liquidity
Chesapeake Energy's banks gave it a big shot in the arm after reaffirming its borrowing base at $4 billion. While the company hadn't borrowed anything on its credit line just yet, it burned through much of its cash balance last year leaving its liquidity uncertain because its banks could have cut deeply into its borrowing base.
So far though, banks have been very lenient with these credit lines. Fellow oil and gas producer WPX Energy(NYSE:WPX), for example, recently received $1.2 billion in commitments on its credit line, despite unloading $1.2 billion in assets that had backed its facility since the start of this year. Not only that, but WPX Energy's banks amended the facility's terms and covenants to give it "increased flexibility and full access to the facility." As such, it provides a lot of clarity as well as ample liquidity for WPX Energy to use during the downturn.Read more by clicking here.
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