One Oklahoma City-based driller’s credit line was recently increased, which could be a sign the business is doing well.
Last week, the Bank of Nova Scotia raised the credit limit for Gulfport Energy Corp. by $200 million, giving the Oklahoma City company an overall limit of $1.2 billion, writes the Journal Record’s Sarah Terry-Cobo.
Banks typically make their lending decisions based off of a driller’s assets. Terry-Cobo writes that includes how much oil, natural gas and natural gas liquids a company can extract for a profit at a certain price.
When the exploration and production sector’s lending limit gets raised, it’s a sign for the whole industry that times are getting better, said Stuart MacDonald, energy finance professor at the University of Central Oklahoma. That hasn’t happened yet for all the state’s drillers, but higher commodity prices could help boost their credit soon.
Terry-Cobo told KGOU’s Business Intelligence Report that the increased credit line should been boon for Gulfport Energy, and is an indication that the company’s leaders have made good moves this year.
“They bought some good land leases and producing wells from a small private company that's operating in the SCOOP play,” Terry-Cobo said. “That adds more oil to their mix compared to historically when they were more a natural gas driller. So that boosts them because they have more collateral, and the collateral in this case are the good reserves and the places to drill that they bought from that other company.”
As of last week, Terry-Cobo says other Oklahoma City-based drillers have not received an increase in their credit ceilings. However, she says if the West Texas Intermediate price of oil continues to hover in the range of the mid-to-upper 50 dollars per barrel range, then all extraction companies will have more collateral. Increased access to credit could mean they drill more.
“It also could mean that they use that expanded credit line to pay down debt they already have or to pay dividends to shareholders. It's generally a sign that things are improving overall for the industry,” Terry-Cobo said.
FULL TRANSCRIPT
McCleland: It's the Business Intelligence Report, a weekly conversation about business news in Oklahoma. I'm Jacob McCleland. I'm joined today by Sarah Terry-Cobo. She's a senior reporter at The Journal Record newspaper. Sarah thanks for joining us.
Terry-Cobo: Thanks for having, Jacob.
McCleland: Oklahoma City-based Gulfport Energy's credit limit was recently increased. Why is it significant that their borrowing limit was increased?
Terry-Cobo: Well at this point it appears to be a boon for Gulfport and some of these analysts say that's because they've made some smart moves this year, their executives have made smart moves this year. They bought some good land leases and producing wells from a small private company that's operating in the SCOOP play. And that's an acronym that stands for South Central Oklahoma Oil Province. That adds more oil to their mix compared to historically when they were more a natural gas driller. So that boosts them because they have more collateral, and the collateral in this case are the good reserves and the places to drill that they bought from that other company.
McCleland: How about other Oklahoma City-based drillers. Have they seen their credit limit increased as well?
Terry-Cobo: Well so I checked around late last week and I didn't see anyone else with their credit limit expanded. But if oil prices continue to hover around the mid to high 50s, that's per barrel of West Texas Intermediate, the U.S. benchmark for prices, then that means everyone who has more collateral because the value of their reserves have increased.
McCleland: And so what happens if credit limits rise for everybody?
Terry-Cobo: Well if people can borrow more money that could mean they drill more. It also could mean that they use that expanded credit line to pay down debt they already have or to pay dividends to shareholders. It's generally a sign that things are improving overall for the industry.
McCleland: Let's talk about another story that you wrote recently, Sarah. The Federal Energy Regulatory Commission denied Magellan Midstream Partners' request to create an independent marketing affiliate for an interstate crude pipeline. First why did Magellan want to do this?
Terry-Cobo: Well, the CEO Mike Mears tells investors he wasn't surprised by the response of FERC Commissioners. But he says he really wanted to get clarity on what these affiliate companies can and can't do in terms of offering discounts to their customers. And FERC says that would be a violation of the Interstate Commerce Act.
McCleland: But this might be a bad thing for other companies. Why so?
Terry-Cobo: Well one source says he thinks this opens up those competitors who have those third party marketing affiliates for possible enforcement action by FERC. So Energy Finance Professor Stewart MacDonald at the University of Central Oklahoma says the agency is known for changing its rules, then punishing companies retroactively. And now FERC has this published opinion that says those third party affiliates violate interstate commerce by offering discounts. But one Houston based analyst with Heikkinen Energy Advisors - his name is David Amoss - he says he's not so sure about that potential threat.
McCleland: So how does this all tie into the export market for crude oil?
Terry-Cobo: Well so another university professor - this time Debbie Fleming at Oklahoma City University - she says she thinks FERC is being cautious with its ruling to Magellan. That's because the export market opportunities have been expanding so much since late 2015, that's when Congress ended the nearly 40 year old ban on exporting crude oil.
McCleland: So how will this impact consumers?
Terry-Cobo: It's probably too soon to tell at this point. We'll have to wait and see. But generally extra profits go to shareholders. Savings aren't often passed on to people who buy gasoline at the pump.
McCleland: Sarah Terry-Cobo is a senior reporter for The Journal Record newspaper. Sarah thank you so much.
Terry-Cobo: It's great to be here. Thanks, Jacob.
McCleland: KGOU and the Journal Record collaborate each week on The Business Intelligence Report. You can find us on social media. We're on Facebook and Twitter. We're @journalrecord and @kgounews.
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