Sabine Oil & Gas Corp., the exploration and production company that merged with Denver-based Forest Oil Corp. last year, said its banks may cut its fully drawn $1 billion credit line after oil prices plunged.
“Based on discussions with the lenders under the revolving credit facility, the company believes that its borrowing base may be reduced significantly,” Sabine said Tuesday in an earnings statement.
The potential credit squeeze has raised “substantial doubt” about the company’s ability to continue as a going concern, according to the statement. U.S. crude prices have collapsed more than 50 percent since peaking last year at about $107 a barrel, leaving oil producers facing reductions to their asset-based credit lines.
“We recognize that market dynamics have changed considerably in the past year, which has impacted the company’s financial position,” David Sambrooks, Sabine’s chairman and chief executive officer, said in the statement. “Our management team and board of directors are taking proactive steps to strengthen our balance sheet and enhance liquidity.”
Sabine had fully drawn its $1 billion revolving credit line as of March 15, according to the statement. The Houston-based company had about $327 million in cash on hand.
The oil producer hired financial adviser Lazard Ltd. and law firm Kirkland & Ellis LLP to suggest “strategic alternatives,” Sambrooks said. “We fully expect to continue operating in the ordinary course throughout this process.”
Sabine merged with Denver-based Forest to create one of the biggest operators in East Texas.
Forest’s bondholders last month claimed they were deprived of $584 million after First Reserve Corp.-backed Sabine structured a merger to avoid redeeming their debt. The value of their holdings has continued to plummet.
The $578 million of 7.25 percent notes due June 2019 traded at 17.75 cents on the dollar on March 26, tumbling from as high as 100.6 cents on May 6 when the merger was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt’s down 79 percent since Dec. 15, the day before the completed merger was announced with revised terms eliminating the need to repay bondholders at 101 cents.
Forest’s noteholders were punished by a rarely used loophole that allowed the oil and gas producer to bypass repaying the debt above face value, according to debt researcher Covenant Review.
