Achieving High IRR's Financing Oil Deals
Entry posted by BlackLine Resources ·
TODAY'S INVESTMENT GOAL:
How to achieve high Internal Rates of Return, (IRR), with a properly structured transaction based on existing oil and gas production … without the market risk of most oil and gas investments. Can this be done?
Requirements to achieve the strategy and returns for discussion:
Buy production at a reasonable discount
Evaluate the production as to the operator’s capability to deliver what is purchased
Hedge the acquired oil/gas to eliminate market risk
Acquire production at a discount
The niche is the small to medium sized producer that has found development capital difficult to raise due to banking reserve requirements after the oil/gas price crash of 2014-2018.
Deal with producers that have existing PDP production that can be leveraged and provide the capital to improve it.
The oil is ‘rented’ for a term under a delivery schedule obviating the risks of onerous working interest structures, joint venture follies, drilling and equipment issues and any assortment of the usual risks. The investor is not an oil company…
Oil Company Benefits:
Not an interest bearing loan, a footnote to the balance sheet
Zero equity take-out, the company parts with none to the investor
Evaluate the operator’s capability to deliver
The existing production is evaluated by a major engineering firm. They deliver a comprehensive report regarding the ability of the oil company to meet their delivery obligations for the length of the term.
The amount of oil purchased varies based on the capital needs of the company.
Oil/Gas is delivered on a stated monthly schedule, that matches the decline curve of the production.
The investor becomes part of the division order to secure repatriation of the invested amount, satisfying the delivery contract.
Hedge the acquisition to avoid market risk
The desire is to avoid all market risk… a put is purchased on every barrel of oil bought, matching exactly with the delivery schedule.
What are the risks?
1. Market: Risk Factor – NONE
Eliminated due to hedging
2. Counter party on the hedge: Risk Factor – MINIMAL
Reduced by using top credit firms.
3. Delivery: Risk Factor – MINIMAL
Reduced by quality engineering during due diligence.
4. Environmental and Title: Risk Factor – NONE
One of the top oil and gas law practices in the country prepares the review of title and environmental risks.
5. Character: Risk Factor – MINIMAL
Extensive background and credit record of the operator and producer is performed and evaluated.
The capability to have a high IRR, (much higher than most oil companies make historically).
The investor has no downside market risk and can structure the transaction so they have upside profit potential.
The investor has no operating expense, is not subject to being over-operated, has no equipment, will never get a cash call.
The returns available via this structure are generous as to IRR’s, much higher than other investments with similar risk profiles.