After a decade of increasing prices, conditions in the domestic petroleum industry changed adversely for many companies in 1982. Perceptions of the future value of reserves by the financial community have an impact on the ability of producing companies to borrow against those reserves.

This paper will discuss how a group of oil and gas banks determine loan value using an identical reserve base. Also examined is the difference in loan value a particular bank will arrive at in todays environment versus the loan value that would have been reached at the beginning of 1982.

The variables used in determining a loan amount are analyzed, and their sensitivity to different scenarios are examined. Pricing forecasts, the split of value between oil and gas, the discount rate, and the loan coverage ratio for different banks are compared. The conclusions illustrate the importance of loan coverage and the most sensitive areas to consider in keeping loan to collateral margins satisfactory.

The methods banks use to determine the amount they are willing to lend will vary with each bank's experience in energy lending, the size and skill of its engineering staff, and to a some degree its emphasis on energy lending. A survey taken among energy lenders indicates the loan amount tends to be similar despite the variety of methods used.

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