Redetermination against a price deck is not a flaw in reserve-based lending. It is the design. The problem is what operators are funding with it.
Every upstream operator understands how a borrowing base works. Reserves are engineered, a price deck is applied, advance rates are set, and availability is established. Twice a year, usually, the whole exercise is repeated and the number moves.
What gets discussed less often is the timing characteristic that falls out of that mechanism — and it is not a subtle one. Availability expands after strength has already been realized, because the redetermination uses a deck informed by where prices have been. And it contracts after weakness has already arrived, for the same reason.
Which means that an operator whose equipment and infrastructure capital comes out of the revolver has a structural guarantee: they will have the least borrowing capacity at precisely the moment opportunity is greatest, and the most capacity when the case for deploying it is weakest.
This is not a criticism of reserve-based lending. It does exactly what it is designed to do. The question is what you are asking it to fund.
Play it forward against this year. Crude runs above $110 in March. Completion economics are the best they have been in years, service capacity is available, and an operator with DUC inventory has an obvious move. What is the borrowing base at that moment? It reflects a redetermination performed against a deck set before the run-up. Availability is sized to a world that no longer exists, and the operator is capacity-constrained at the exact moment the opportunity is largest.
Now run it the other way. By early July, WTI is in the mid-$60s. Eventually the redetermination catches up to the prior strength and availability improves — arriving with more room to borrow precisely when the case for spending has deteriorated.
For its intended purpose — financing reserves against reserves — that is fine and appropriate. The mismatch arises when operators route a different kind of capital through it.
An ESP lifting a well does the same work at $65 as it does at $110. Its value as collateral does not swing $45.
Yet at a great many operators, that equipment is funded from the same facility that redetermines against the price deck — so an asset with stable value and steady contribution inherits the cyclicality of an instrument designed for something else entirely.
Production equipment is not a reserve. An electric submersible pump installation, a compression package, a gathering line, a produced water recycling facility, a SCADA build-out: these are physical assets with identifiable value, defined useful lives, and a productive contribution that is largely independent of where crude traded last quarter. The lift program gets deferred not because the lift economics changed — they did not — but because availability compressed.
One operator running a mid-sized Permian position described the pattern without any particular drama: they had never been declined for a loan, and they had also never once financed the water system, which is why they drilled four fewer wells than the acreage supported.
The structural answer is uncomplicated and underused. Move equipment and infrastructure capital off the borrowing base. Fund production equipment, lift systems, compression, gathering, and water assets with capital that does not redetermine against a price deck — capital whose availability is a function of the equipment and the operator rather than of where the strip closed.
Two things happen immediately. The equipment program stops being hostage to commodity timing, which means the lift optimization gets funded in the quarter it makes sense rather than the quarter the revolver allows. And the borrowing base is freed for what it is actually good at — funding drilling and acquisitions against reserves, with more room than it had.
It is worth adding that most bank relationships welcome this rather than resisting it. A lender whose exposure to an operator is reduced, while the relationship and the drilling facility remain intact, has generally improved their position. Operators frequently assume that financing equipment outside the borrowing base will be read as a negative signal. In practice it reads as capital discipline, which is what it is.
Operators tend to think carefully about the cost of their capital and rather less about the behavior of it. In a year that has traversed a $45 range twice, behavior has mattered enormously more than cost.
An instrument that gives you the least room when the window opens is expensive in a way that never appears on a term sheet — and it is expensive every single cycle, not just this one.
First National Capital Corporation finances production equipment, artificial lift, compression, gathering, and produced water infrastructure outside the borrowing base — no covenants, no price-deck redetermination, closings in weeks. Start a conversation.