As banks have pulled out of financing oil and gas operations and other traditional sources of financing, such as equity investments or reserve-based loans (RBLs), have dried up, private US oil and gas producers are looking to the booming market for alternative assets.
It is a proven developed producer (PDP) securitization, in which an oil or gas producer issues bonds in an asset-backed securitization (ABS) transaction. In other words, upstream producers use cash from their oil and/or gas production as collateral for notes placed with investors.
Securitization of energy assets
The first such securitization of energy assets took place in 2019, but it has quickly gained popularity over the past year as many private producers try to diversify their funding sources.
“Oil and gas asset-backed securitizations help diversify funding sources for companies that would normally access capital from more traditional sources, such as reserve-based lending (RBL), high-yield bond issuance or equity investments,” Fitch Rating said in the early 2020s when this type of financing was brand new and the pandemic had not yet crushed oil demand.
“Newly issued transactions provide stable cash flow as depletion rates are fairly predictable depending on well age and overall diversification,” the rating agency noted back in February 2020.
Even during the pandemic and volatile prices in 2020 and 2021, oil and gas developed production (PDP) securitizations have shown much lower volatility, “largely due to commodity price hedging and structural features of the securitizations,” the credit rating company DBRS Morningstar said in May 2021
PDP securitization performance has remained resilient during Covid, despite high oil and gas price volatility and operator bankruptcies during the pandemic, Fitch Ratings said in the report in September 2021.
“The required hedging of most production volumes limits the effects of hydrocarbon price fluctuations on expected revenues.” In addition, PDP production has a low break-even cost, as most of the capital investment costs are incurred,” the credit rating agency said.
Booming Energi ABS market
In 2022, the oil and gas asset securitization market really boomed, with energy ABS deals tripling in value from 2021, according to data cited by Guggenheim Securities Reuters. So far this year, private equity firms have sold $3.9 billion in PDP securitizations to investors, up from just $1.2 billion last year.
This year also saw the largest securitized financing for a US power producer, backed by a portion of its manufacturing assets, since PDP’s securitization financing deals began three years ago.
It was a transaction in October for 750 million dollars securitized financing for natural gas producer Jonah Energy LLC, a Denver-based firm that operates the Jonah and Pinedale Fields in Sublette County, Wyoming. Jonah Energy has successfully closed its first securitized financing transaction by offering $750 million in fully amortizing notes backed by a portion of its production assets.
Jonah Energy’s assets and operations are located in the Greater Green River Basin in Sublette County, Wyoming, and consist of over 2,400 producing wells and over 130,000 net acres located in and around the Jonah Field.
“I am pleased to have completed a long-term financing transaction that fully restores our RBL, which positions us with a strong balance sheet to pursue the significant drilling opportunities we have on our acreage and strategic opportunities that may arise,” said the Chairman and Jonah Energy CEO Tom Hart.
Guggenheim Securities, which acted as sole structuring adviser, book-running manager and placement agent for the offering, said Jonah Energy’s is the largest securitization completed to date.
“This ABS transaction, which represents the largest PDP securitization completed to date and the third 144A structured by Guggenheim Securities for the energy sector, reflects the confidence of industry leaders and market participants in the suitability of energy-related ABS for the market,” he said. is Anuj Bhartiia, senior executive in Guggenheim’s structured products team.
PureWest Energy, Wyoming’s largest natural gas producer, closed successfully in August a second securitization — after one last year — offering $365 million in senior notes backed by a portion of PureVest’s natural gas assets. The transaction follows PureVest’s $600 million first securitization in November 2021.
PureVest Energy is expected to distribute the proceeds of the note offering, together with excess cash on PureVest’s balance sheet, to its equity holders in the third quarter of 2022.
Oil and gas securitization offerings could benefit both investors and producers, Daniel Allison, energy finance partner at law firm Sidley Austin LLP, wrote last year. Hart Energy. Investors have a relatively predictable cash flow profile of oil and gas PDPs, so they – and the rating agencies – see production risk as a “tolerable variable,” Allison says. Producers, for their part, can use securitization of energy assets to diversify their capital structure or take advantage of this alternative market when others are less favorable, Allison says.
Author: Cvetana Paraskova for Oilprice.com
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