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Capital for small independents has been an issue since the downturn and doesn't appear to be abating even with $65-70 oil.  Banks have been less interested in providing much needed capital to these smaller entities.

When the oil market crashed in 2014, there were 177 bankruptcies as a result.  Why did they occur?  Simple... the banks lent the oil companies money based on their reserves, valued at $80-100 per barrel.  When the market crashed to $27 a barrel, the banks called the loans but the money was in the ground and everyone was upside down.

Needless to say, it was a bad decision all around; relying on a fractious commodity price to service a hard asset with a terminable interest rate that needed to be paid back come hell or bankruptcy. The result is the small to medium operator has no source of capital.  They're too small for the larger banks or private equity firms to be interested.  

Volumetric Production Payments, (VPPs), have been used prior to even the oil and gas industry drilling its first well... in the gold rush days to be exact.  It provides financing by using existing production to forward finance re-works, re-completions, PUD drilling etc.

The production is bought at a discount to the market and a strict delivery schedule is offered to the financial source and hedged.  Typical terms are 3-4 years at the end of the term, the producer gets his total production back.  Normal terms are for the producer to retain 40-70% of his existing production during the term.

There are about 9,000 independent oil and gas producers in the U.S and employ an average of just 12 people...this is a market niche that desperately need to be served.

Entries in this blog

Omnipresent Big Need for Capital... Alternatives?

Smaller producers who are finding it more difficult to secure bank credit, with many loans still under pressure, are seeking new ways to capture funding.  As prices are making it a bit easier to add to the balance sheet, versus $26 per barrel in recent times, new avenues for capital have opened up. We see the increased ability of 'non-bank' capital sources to serve these operators that have a large need for capital.  Reserve Based Lending, (RBLs), are certainly in transition and many smaller operators are simply too small to attract this capital.  Mezzanine debt and some credit funds have typically been the next horizon for capital, but other alternative methods are needed to fulfill this capital need that make sense to these sized operators. Backstory: the Comptroller of the Currency's revised lending guidelines have become stricter and banks are being squeezed.  More than $208 billion in upstream debt existed at the end of 2017, with nearly $75 billion not in compliance with the new banking strictures... So, what does this mean for the producer?  As these mature, some may be renewed, many will not and where there's a gap and if companies can't renew their RBL, they'll need other methods to fund themselves.  Solution for some, not for all: Volumetric Production Payments, (VPPs) on existing production.  Not bank debt, non-recourse and there's no equity relinquished to the private equity bunch.  We love to see PDP assets and can leverage them to grant the capital these firms need effectively and efficiently, usually within 30-45 days, versus the slog through banking procedures. It makes sense that as the traditional methods of funding are under pressure, that direct capital can be accessed through ways that make sense to the operator... he keeps the upside, typically at least 70% with facilities up to $20 million. Always open for discussion!
 

Capital for Independents Take on a New Look

Capital for small independents has been an issue since the downturn and doesn't appear to be abating even with $65-70 oil.  Banks have been less interested in providing much needed capital to these smaller entities. When the oil market crashed in 2014, there were 177 bankruptcies as a result.  Why did they occur?  Simple... the banks lent the oil companies money based on their reserves, valued at $80-100 per barrel.  When the market crashed to $27 a barrel, the banks called the loans but the money was in the ground and everyone was upside down. Needless to say, it was a bad decision all around; relying on a fractious commodity price to service a hard asset with a terminable interest rate that needed to be paid back come hell or bankruptcy. The result is the small to medium operator has no source of capital.  They're too small for the larger banks or private equity firms to be interested.   Volumetric Production Payments, (VPPs), have been used prior to even the oil and gas industry drilling its first well... in the gold rush days to be exact.  It provides financing by using existing production to forward finance re-works, re-completions, PUD drilling etc. The production is bought at a discount to the market and a strict delivery schedule is offered to the financial source and hedged.  Typical terms are 3-4 years at the end of the term, the producer gets his total production back.  Normal terms are for the producer to retain 40-70% of his existing production during the term. There are about 9,000 independent oil and gas producers in the U.S and employ an average of just 12 people...this is a market niche that desperately need to be served.
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