One of the key sources of funding for American shale is evaporating, just as the sector needs it more than ever, Bloomberg reported. Banks lending against the oil and natural gas reserves of hundreds of independent U.S. drilling companies have pulled back from the sector at an unprecedented rate this year after energy prices slumped. There’s every indication they’re not done: Many in the industry expect further reductions to credit facilities in the fall, with higher costs and more stringent protections for lenders. All that comes at a time that could scarcely be more challenging for shale. Weakened by poor returns to shareholders, it was getting shut out of the bond and equity markets even before the COVID-19 pandemic decimated global demand. With crude prices staging a limited recovery in the last two months to around $40 a barrel, shale operators face an uncertain future, one where they must drill to generate cash flow while facing a higher cost of capital. Shale lending doesn’t just involve banking behemoths. but smaller regional entities. Shale companies negotiate their credit lines in spring and again in fall. Any adjustments are typically modest, but banks slashed many loans this spring. According to S&P Global Ratings, borrowing bases, which are determined by the collateral value of oil and gas reserves, were reduced by an average of 23%. Credit commitments were lowered by 15% on average.
