Capital Constrained Independents Find a Better Way

[BlackLine Resources + 12]

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.