As banks have withdrawn from financing oil and gas operations and other traditional sources of financing such as equity investments or reserve borrowings (RBL) have dried up, private US oil and gas producers are looking to a booming market for alternative financing.
This is proven developed producing (PDP) securitization, where an oil or gas producer issues bonds in an asset-backed securitization (ABS) transaction. In other words, upstream producers use the cash from their oil and/or gas production as collateral for the notes placed with investors.
Securitization of energy assets
The first such securitization of energy assets took place in 2019, but has quickly gained popularity over the past year as many private producers seek to diversify their funding sources.
“Securitisations backed by oil and gas assets help diversify funding sources for companies that would normally access capital from more traditional sources, such as said Early 2020, when this type of financing was brand new and the pandemic had not yet dented oil demand.
“The newly issued transactions offer stable cash flow as depletion rates are fairly predictable based 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-produced (PDP) securitisations have shown much less volatility, “mainly due to commodity price hedges and structural features of the securitisations,” according to rating agency DBRS Morningstar said in May 2021.
The performance of the PDP securitization remained stable during Covid, despite high volatility in oil and gas prices and operator bankruptcies during the pandemic, Fitch Ratings said in a report in September 2021.
“Hedges required for a majority of production volumes limit the impact of hydrocarbon price fluctuations on expected revenues. In addition, PDP production has low breakeven costs as most of the investment costs are incurred,” the rating agency said.
Booming Energy ABS Market
In 2022, the oil and gas asset securitization market has really blossomed, with energy ABS deals trebling in value from 2021, according to data cited by Guggenheim Securities Reuters. So far this year, private companies have sold $3.9 billion worth of PDP securitisations to investors, up from just $1.2 billion last year.
This year also saw the largest single securitized financing for a US energy producer, backed by a portion of its manufacturing assets, since the PDP securitization financing operations began three years ago.
This was an October transaction for $750 million securitized financing for natural gas producer Jonah Energy LLC, a Denver-headquartered company operating in the Jonah and Pinedale fields in Sublette County, Wyoming. Jonah Energy successfully completed its first securitized financing transaction by issuing $750 million in notes.
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 in and around the Jonah Field.
“I am pleased to have completed a long-term financing transaction that fully repays our RBL, enabling us with a strong balance sheet, the significant drilling opportunities that we have on our property and the strategic opportunities that may open up to us.” , to track. said Tom Hart, President and Chief Executive of Jonah Energy.
Guggenheim Securities, the sole structuring advisor, accounting manager and placement agent for the offering, said Jonah was Energy’s largest asset-backed securitization to date.
“This ABS transaction, which represents the largest PDP securitization completed to date and the third 144A that Guggenheim Securities has structured for the energy sector, reflects the confidence of industry leaders and market participants in the suitability of energy-related ABS in the marketplace. said Anuj Bhartiya, senior managing director on the Guggenheim structured product sourcing team.
PureWest Energy, Wyoming’s largest natural gas producer, successfully closed in August, a second asset-backed securitization — following one last year — of $365 million in asset-backed notes backed by a portion of PureWest’s producing natural gas assets. The transaction followed PureWest’s initial $600 million securitization in November 2021.
PureWest Energy expects to distribute the proceeds of the Debenture Offering to its shareholders along with any excess cash on PureWest’s balance sheet in the third quarter of 2022.
Oil and gas securitization offerings could be beneficial for both investors and producers, Daniel Allison, energy finance partner at law firm Sidley Austin LLP, wrote in last year hard energy. Investors have a relatively predictable cash flow profile for an oil and gas PDP, so they — and rating agencies — view production risk as “a tolerable variable,” Allison says. For their part, producers can use energy asset securitization to either diversify their capital structure or tap into this alternative market when others are less favorable, Allison said.
By Tsvetana Paraskova for Oilprice.com
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