What is the standard typically? Use the bank commodity price deck and calculate PV10 and give 100% of PDP, 75% of PDNP and 25% PUD? What type of commodity pricing do banks assume in this market? $80-90 on oil and $3.50 to $4.00 on gas?

It depends on the bank, ie. big or small bank, risk tolerance, how long you have been their client, etc.

At year end, our "smaller sized bank" had a price deck of 2011-$60/$4.5, 2012-$62.5/$5, 2013-$65/$5.5, 2014-$65/6 and flat there after. That is super conservative, they felt like this price spike is temporary and did not feel comfortable increasing their price deck.

I believe they only lend out based on 60% of your PV(9) PDP reserves, again super conservative. I don't know what they lend for PDNP,PROB, and POSS.

A-K

Yikes, that is super conservative.

One of the large banks told me 100% of PDP, 70% of PDNP, and 50% of PUD at PV9. They did not disclose their price deck for me though. I have seen their price deck in the past and I would guess its something like $75-85/$4.00-4.50 for 2011

That sounds great, are you required to hedge?

Big banks don't have the time to mess with anything under $10-20mm.

I work for a small independent O&G company and we had a hard time just getting people to talk to us.

A-K

Good question. I am not sure about hedging requirement. I don't actually work for an O&G company, but we advise O&G companies in various situations. My (potential) client needs to recapitalize and I am trying to get as smart on the issues as I can before our meeting.

if you don't mind sharing what kind of assets your client has I may be able to offer my two cents.

A-K

Some oil, some gas (more than 40% of both, so a good mix). Mostly offshore (shallow water GOM primarily).

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One of the large banks told me 100% of PDP, 70% of PDNP, and 50% of PUD at PV9. They did not disclose their price deck for me though. I have seen their price deck in the past and I would guess its something like $75-85/$4.00-4.50 for 2011

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I'd have to imagine their price decks must be pretty conservative to do 70% of PDNP and 50% of PUD.

50%...that's INSANE

small bank I deal with has 60% on PDP, 20% on DNP, and 5% on PUD (all at PV9)

as an independent producer or Working Interest owner I would hedge 50-80% of my oil production at todays prices (I think oil prices will come down soon) and only hedge gas if I had to. just my opinion A-K

[This message has been edited by A-K (edited 4/14/2011 2:07p).]

I'm on board with that, A-K. I don't see a lot of downside on gas (not worth hedging against, anyways).

On the other hand, Oil was firmly in the $80's and then KAPOW...over $100. A lot of political events driving it more than true supply/demand issues. Seems to currently be artificially propped up.

blue-eyes are you independent?

indeed

startup. acquired our first production June '10

sweet

Spoke to the banker where I thought the pricing was ~$75-85 and its actually $70 growing to 75 in about 5 years. He said they shoot for at least 1.75x coverage on total proved reserves and at least 2/3 of that needs to be PDP and no more than 20% can be PUD. You also get a 25-30% per dollar reduction in borrowing base for any unsecured debt layered in to the capital structure.

A-K & Blue, do you guys operate?

There seems to be quite a few O&G production guys in here so I figured I'd offer my two cents. General consensus is that oil prices currently have about a $20-25 premium built in due to fear of inflation and world events according to most reports and analyst opinions. That said, it would be a wise move to hedge a large percentage of oil production at these prices, as they are not sustainable for the next year or so. There is little reason to hedge any gas production at these prices, there is not much risk involved.

Now for my shameless plug, if any of you are looking to do some hedging and need a broker or simply need advice, I work for a commodity broker and specialize in hedging techniques and strategies for independant producers. We have a great reputation, and are very good at what we do. Feel free to PM me with your email or phone number or email me at toddp1985 at yahoo dot com and I will be in touch to set up a time for us to talk. My company is Coquest and we are based out of Dallas.

I am an oil and gas reserve lender. Lots of conflicting and bad information on this thread.

No one is lending you 70% of PDNP and 50% of PUD. That is a risk factor. They will not risk PDP, risk PDNP by 30%, and PUD 50%. Most banks will not allow a borrowing base to be comprised of more than 20-30% of non-producing reserves (i.e. PDNP or PUD). No Possible or Probable credit is given in this area of the capital spectrum.

Price decks flatten out in the $70 - $75 range on oil, and $5.25 to $5.75 range in gas. That is an average and there are obviously outliers. Macquarie Tristone's Lender Price Deck survey (I believe its available on their website) will show you where banks stand today.

PM me if you are interested in more. We provide facilities in the $2 to $20 million range with the ability to partner or syndicate the facility if the need is larger.

Golfer,

Thats consistent with what the banker I spoke to yesterday said.

great input everyone. Im just now learning the financial side of the O&G business and its great that you guys are sharing knowledge.

Claym711, yes we operate. A buddy started his own company and I help him manage it. We started in late 2008. We are a small company but we are growing.

TPeezy, we used Coquest for our hedge last year (we had to hedge for the bank to give us a borrowing base). We are thinking about hedging some more production at these prices. I'm going to send you an email with my contact info so we can discuss.

golferag, is it common for lenders to take an ovveride on properties when providing credit facilities?

A-K

I would say taking an override is quite UNcommon.

They are lenders, not speculators.

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No one is lending you 70% of PDNP and 50% of PUD

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50%...that's INSANE

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I'm actually so surprised that banks are so weak in the out years on oil but so strong on gas. High $5s, even $6? Yikes!

No overrides until you get to second lien or mezzanine financing.

TPeezy - did you just join Coquest?

Yep, I have been in the industry for a couple of years but just starting with Coquest. Why do you ask?

We know the guys over there. Are you in Houston or Dallas?

Oh nice! Have you done business with them before? I will be in Dallas. However I am currently in Houston

We have customers that have utilized Coquest for hedging advice.

Good stuff! Well I'm sure we will cross paths at some point. I'm looking forward to it!