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!