Abstract
One very important task in connection with any oil and gas loan is to determine a loan value and structure the terms in such a way that the property supporting the loan provides an adequate coverage to assure a payout for the lender. After the lender has completed the analysis or appraisal of the reserves and prepared a revised projection based on the lender's own assumptions, most banks use that revised projection as a basis for computing various coverage ratios and tests in order to determine whether the property is adequate collateral for the loan. This paper shall examine on an anonymous basis a sample of 15 oil and gas loans that have been made within the last two years in an attempt to provide insite into what the current standards are for this type of loan.
For the purposes of this analysis eight different commonly used ratios and other tests have been computed for each of these 15 sample loans and the results of these computations have been summarized on Tables I and II. All of the loans chosen for this sample have been syndicated among a banking group, and in each loan the banks have assumed the project or reserve risk. In the computation of these ratios, no attempt has been made to revise the projections that have been furnished by the borrower (in the Information Memorandum) for each of these loans except that all interest computations and present values have been determined at a rate of 14% per annum. As a result, the comparisons shown on Tables I and II may be distorted to some extent by any variation in the assumptions that have been made in the preparation of the economic projections for each of these 15 sample loans. However, later in the conclusion section of this paper there is a discussion of the sample loans in order to point out any assumptions that differ in a significant way from the normal criteria that most banks require in connection with this type of loan.
In the next section there is a definition of the way that each of these ratios has been computed.
