© Reuters. FILE PHOTO: The sun is seen behind a crude oil pumping hole in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo/File Photo
By Shankar Ramakrishnan and David French
(Reuters) – Private U.S. oil and gas companies are increasingly turning to appropriate financing structures to securitize their production, providing a funding avenue for producers and owners as traditional sources become more expensive or simply run out.
Called PDP asset-based securitization (ABS), the product derives revenue from companies’ proven oil and gas exploration, development, and production (PDP) operations and uses That cash flow serves as collateral for the bonds sold to investors.
With banks under pressure from stakeholders to limit loans to the oil and gas sector due to the sector’s environmental impact, private energy producers – more dependent on bank flows than with listed peers – can maintain access to external financing through this niche product.
“This product resonates with private upstream companies that rely heavily on revolvers from commercial banks,” said Daniel Allison, partner and energy specialist at law firm Sidley Austin LLP. , but the ability to provide such financing has decreased.”
While the first rated PDP securitization was completed by Raisa Energy in September 2019, volatile commodity prices and a wave of producer bankruptcies in 2020 have hampered initial adoption. head. However, over the past year or so, and with commodity prices hitting multi-year highs in 2022, companies and investors are paying more and more attention to the issue.
According to Guggenheim Securities, more than $3.9 billion in energy-related ABS was sold in the public and private markets in 2022, compared with $1.2 billion in 2021. helped arrange, among others, a $750 million ABS sold by Jonah Energy in October – currently the largest PDP securitization completed.
One company that has used the product is PureWest Energy, Wyoming’s largest producer, which sold two such deals: a $365 million banknote in August, following a 600 million issue. dollars in November 2021.
Ty Harrison, PureWest’s chief financial officer, explains that a round of PDP securitization surrounds oil and natural gas wells so that the cash from them is used to pay off debt. A robust hedging strategy ensures volatility in commodity prices does not hinder investors’ solvency.
A hedged bond typically has an investment grade rating, meaning that energy producers, if not rated junk, can raise money at a lower cost: cheap interest rates. about 2 to 3 percentage points more than traditional alternatives like term loans or high-yield bonds, says Harrison.
There are also price benefits for investors, most commonly insurance companies, as this ABS PDP pays at least 100-150 basis points more than similar top-rated corporate bonds. private investment, said an unnamed investor.
Along with funding day-to-day operations, private equity firms that own energy producers are exploring the use of PDP securitization as a payout to investors.
The attraction stems from the fact that acquiring companies cannot sell or list companies at better valuations than simply profiting from higher commodity prices. Securitization efficiently aggregates profits and distributes them to investors as a temporary reward, allowing the owner time to find another exit during the life of the ABS – usually from three to five years.
The Energy Partnership is an example. It is currently pursuing a deal with ABS, after Reuters reported in May that owner Kayne Anderson Capital Advisors and Warburg Pincus were trying to sell the company.
“There will be more deals like this in the future as private equity holders,” said Pete Bowden, global head of industry, energy and infrastructure at investment bank Jefferies. seek to monetize properties that do not reach fair sales valuations.”
The PDP ABS product is not for everyone: it requires oil and gas wells to be produced at a rate consistent with low degradation rates, typically older drilling sites. New shale wells have very large initial production, as hydrocarbons are released through hydraulic fracturing, before rapidly separating.
Sidley’s Allison says there’s a lot of appetite among those with the right product: his company has been approached by half a dozen companies this year to arrange PDP securitization, with many more in talks judgment at an early stage.
“We will see further growth in ABS issuance next year, with upstream players increasingly mining,” said Cory Wishengrad, head of fixed income at Guggenheim Securities. market as an important component of their capital structure”.