The borrowing base is the maximum amount of money a lender will loan to a company, based on collateral values. The Bank determines a discount factor (i.e., a certain percentage which is multiplied against the value of the collateral). The resulting value is the maximum amount of money the Bank will loan to the company. Credit available is the lessor of (i) $ [stated amount of revolver] and (ii) the borrowing base. For oil & gas loans, typically 50% to 60% of proved producing reserves is the base.
Example: If a company has proven reserves worth $10,000,000, and the lender’s discount factor is 50%, the borrowing base is $5,000,000.
The value of oil & gas reserves are based on Third Party Reserve Reports. A report typically includes Proven, Probable and Possible reserves. It includes the Bank’s reserve engineer’s assumptions about valuation of reserves. A percentage of Proven Reserves typically sets the borrowing base.
Collateral values are determined by risk adjusting net present value.
•100% of “seasoned” (i.e. over 6 months of production) PDP (Proved Developed Producing)
•90-95% unseasoned PDP (Proved Developed Producing)
•65-75% of PDNP (Proved Developed Non-Producing)
•20-50% of PUD reserves (Proved Undeveloped)
Total PDNP and PUD should not exceed 25-35% of the valuation. Unproved (probable/possible) reserves are typically not included in reserve based lending (“RBL”).
The borrowing base is typically 50% to 60% of proved producing reserves.
Example #1:
•50-65% of NPV of PDP
•50% of NPV of PDNP
•35% of NPV of PUD reserves
Example #2:
•50-65% of NPV of Proved Reserves
•No more than 25-35% of PDNP and PUD
Typically, no single well should provide more than 15-20% of the borrowing base
In times of depressed oil and gas values a lender may “stretch” the borrowing base by giving higher advance rates for PDNP and PUDS, lending beyond 100% of PDPs or lowering the discount rate.