GUIDELINES FOR COLLATERAL EVALUATION AND CREDIT
CLASSIFICATION OF TROUBLED OIL AND/OR GAS RESERVE
BASED LOANS


SUMMARY

This document sets forth flexible guidelines to be utilized in an
examiner's review of reserve-based loans. The classification of
reserve-based loans is like all loan classification in that it must be
predicated on an independent assessment of all salient credit factors that
are germane to the specific credit being reviewed. The use of these
guidelines by examiners should aid in efforts to ensure that troubled
reserve-based loans receive consistent treatment nationwide.

DISCUSSION

Engineering Reports

The initial step to assessing the creditworthiness of reserve-based loans
is an analysis of the engineering function. Cash flow generated from the
future sale of encumbered oil and/or gas reserves is the primary, and in
most cases the intended, source of repayment. Therefore, the integrity of
engineering data that depicts that future cash stream is critical to the
initial lending decision and equally important to an examiner in the
assessment of the credit quality.

For evaluation purposes, acceptable engineering reports must be an
independent, detailed analysis of the reserve prepared by a competent
engineering group. The report must address three critical concerns:

(1)	Pricing. Prices must be realistic. The report should indicate
consideration for both price inflation and cost inflation over the "life
of the properties".

(2)	Discount factors. Discount rates used should reflect current market
interest rates.

(3)	Timing. Preferably the report should be no more that six months old
and under no circumstances exceed 12 months. The critical factor in
determining the adequacy of the timeliness of the reports is change.
Recent significant price fluctuations or changes in interest rates may
require the examiner to adjust the valuation of the reserves to reflect
currency conditions.

In those cases where the engineering reports do not meet one or more of
the above criteria, the examiner may need to use other methods, e.g.
recent cash flow histories, to determine the current collateral value. In
addition, appropriate comments should be included in the report of
examination and recommendations made to bank management for improving
their engineering reporting.

Again, cash flow generated from the sale of oil and/or gas in the future
is the basic premise of reserve-based lending. For this reason, prudence
mandates that loan values be predicated primarily on reserves that are
"Proved Developed Producing properties (PDP)".

Red Flag or Trigger

A comprehensive analysis of the credit must take place if any of the
following factors are present:

-	The loan balance exceeds 65 percent of the discounted Present Worth
of Future Net Income (PWFNI) of PDP, or the cash flow analysis indicates
that the loan will not amortize over four to five years.

-	The credit is not performing in accordance with terms or repayment of
interest and/or principal, or

-	The credit is identified by the bank as a "problem" credit.

After performing the analysis, the examiner must determine if
classification is warranted. The following guidelines are to be applied in
instances where the obligor is devoid of primary and secondary repayment
capacity or other reliable means of repayment, with total support of the
debt provided solely by the pledged collateral (Collateral dependent
debt).

Classification Guidelines

Proved Developed Producing (PDP) Reserves:

(1)	65 percent of discounted PWFNI, should be classified SUBSTANDARD. A
lesser percentage or less severe criticism may be appropriate in cases
where a reliable means of repayment exists for a portion of the debt. The
65% percentage should be used when the discounted PWFNI is determined
using historical production data ("decline curve analysis engineering").
When less than 75% of the reserve estimate is determined using historical
production data, or the discounted PWFNI is predicated on engineering
estimates of the volume of oil/gas flow (volumetric and/or analogy based
engineering date) the collateral value assigned to substandard should be
reduced accordingly.

(2)	The balance, but not more than 100 percent of discounted PWFNI of PDP
reserves, should be extended DOUBTFUL.

(3)	Any remaining deficiency balance should be classified LOSS.

Other Reserves

In addition to PDP, many reserve-based credits will include Proved
Developed Non-Producing (PDNP) Reserves, Shut-In Reserves, Behind-the-Pipe
Reserves and Proved Undeveloped Properties (PUP) as collateral. Due to the
nature of these other reserves, there are no strict percentage guidelines
for the proportion of the credit supported by this type of collateral that
should remain as a bankable asset. However, only in very unusual
situations would the proportion of collateral values assigned to a
classification category approach the values for PDP.

The examiner must ascertain the currency status of each reserve and
develop an appropriate amount. Examples could be reserves that are Shut-In
due to economic conditions versus reserves that are Shut-In due to the
absence of pipeline or transportation. PUP require careful evaluation
before allowing any bankable collateral value. An example of a bankable
value for PUP could be one that has a binding purchase contract. In every
classification where a bankable value is given for any of these "Other
Reserves", the loan write-up should support fully the examiner's
determination.

SUMMARY

The above guidelines apply to reserve-based loans that are considered
collateral dependent and are devoid of repayment capacity from any other
tangible source. Rarely should bankable consideration be given to loans
that are completely collateral dependent in excess of the liquidation
value of the pledged reserves. Once again, there is no substitute for a
specific case-by-case analysis of applicable credit and collateral factors
pertaining to each individual credit. Frequently, when a lender encounters
problems with a production credit, numerous other types of assets (e.g.,
A/R, inventories, real estate, etc.) are encumbered in an effort to
protect the banks' interests. Other types of collateral and sources of
repayment should be carefully evaluated on a case-by-case basis.

When reserves are considered real property under state law, foreclosed and
debtor in possession properties should be handled in accordance with 12
U.S.C. 29 and 12 CFR 7.3025. In those cases, they should be carried at
amounts that do not exceed their liquidation (quick sale) value supported
by independent appraisals or tangible purchase offers. (See 12 CFR 7.3025
d and e.) Pg. 1 8/2/84