Reserve-Based Lending and Production Loans for Oil and Gas Producers

A borrowing base built on proved developed producing reserves, from the private production lenders that size facilities below bank minimums to the institutional lenders that fund large RBL facilities.

How a reserve-based loan works

The lender takes your reserve report, replaces the engineer's price assumptions with its own price deck, discounts the resulting cash flows, and assigns most of the value to proved developed producing reserves. Proved developed non-producing and proved undeveloped reserves are included at a fraction or excluded. The borrowing base is a percentage of that risked present value; you can draw up to it, and it is redetermined, usually every six months, as production declines, wells are added and prices move.

Interest is index-based plus a margin. Facilities carry covenants (leverage, interest coverage, current ratio), hedging requirements on a share of forecast production, and a cure mechanism if the base falls below the balance: repay the deficiency, add collateral or amortize it over a few months.

Production loans below bank minimums

Bank RBL facilities start in the tens of millions. Private production lenders fund the same structure on a smaller scale, from a few hundred thousand dollars to the low millions, for operators with a package of producing wells and a reserve report. The pricing is higher than a bank's, the engineering review is faster, and the covenants are usually simpler. For many independents this is the first real credit facility they qualify for, and the stepping stone to a bank line later.

Term loans amortized to the decline curve are the other common form: a fixed amount against existing production, repaid monthly from net revenue over two to five years, without a revolving borrowing base.

What moves your borrowing capacity

Four things: the lender's price deck (not the WTI screen price), the share of your reserves that are developed and producing, your lease operating costs, and your hedges. A redetermination after a price drop can cut the base even when production is steady, which is why lenders require hedges and why operators keep a cushion between the balance and the base. Adding proved developed production, through workovers, recompletions or an acquisition, raises the base at the next redetermination.

Working with MercFinancial on a production loan

We match the size of the facility to the lender: private production lenders for packages below bank thresholds, regional and institutional lenders for larger borrowing bases. The file we build is the one a lender's engineer expects, so the review is weeks rather than months.

MercFinancial is a commercial funding brokerage, not a lender. Approval, loan amount, rate, term and funding are decided by the funding source on the strength of the file; nothing on this page is an offer or a commitment to lend.

Frequently asked questions

What advance rate do lenders use on PDP reserves?

It varies by lender and market, and it is applied to the lender's own risked PV, not to your engineer's PV10. Bank facilities commonly land around half to two-thirds of risked PDP value; private lenders can be higher or lower depending on how they price risk. The only way to know your number is to have the reserve report run by the lender.

Do I need a third-party reserve report?

For a bank facility, yes, from a recognized engineering firm. Private production lenders will often start from an internal or smaller engineering report plus production history by well, then run their own evaluation. A report older than twelve months is usually treated as stale.

What happens at a borrowing base redetermination?

The lender re-runs the reserves on its current price deck and resets the base. If the base rises you gain availability; if it falls below the balance you have a deficiency to cure, typically by repaying it, adding collateral or amortizing it over three to six months. Our redetermination guide walks through the process and the cures.

Can a small operator with ten wells get a reserve-based loan?

Yes, from a private production lender, if the wells have a production history and a reserve report supports the value. Banks will generally not consider it. A term loan amortized to the decline curve is the usual structure at that size.

Are hedges required?

On a reserve-based line, usually on a portion of forecast production for one to three years. Smaller term loans may not require them. Hedging protects the borrowing base, and a lender will treat a hedged file as lower risk.

Guides on this topic

How Reserve-Based Lending Works for Oil Producers — How reserve-based lending turns PDP reserves into a borrowing base, with typical advance rates, covenants, and pricing for oil and gas producers.
Borrowing Base Redeterminations: An Operator's FAQ — A plain-English walk-through of what happens at a borrowing base redetermination: the process, the price deck, deficiency cures, and when to refinance.
How WTI Price Swings Change Your Borrowing Capacity — Lenders don't use the WTI screen price to set your borrowing base — they run reserves through their own price deck. Here is how that gap actually works, and what to do about it.
What Oil and Gas Lenders Look For: A Data Checklist — The document checklist energy lenders expect before they price a deal: reserve report, LOE detail, hedge book, title status, and financials, explained item by item.
A Permian Operator's Playbook for Financing Growth — A stage-by-stage financing playbook for Permian Basin operators: equipment, working capital, JIB tools, reserve-based loans, and acquisition debt.