A new type of oil and gas funding is emerging
Private U.S. oil & gas producers are now looking for new funding sources as banks are reluctant to finance oil and gas operations.
That’s the proved developed producing (PDP) securitization, in which an oil or gas producer issues bonds in an asset-backed securitization (ABS) transaction. The cash generated from upstream production is used as collateral to the notes that are issued to investors.
Securitization of Energy Assets
Although the first securitization of energy assets took place in 2019, it quickly gained popularity as private producers seek to diversify funding sources.
“Securitizations backed by oil and gas assets help diversify funding sources for companies that would typically access capital from more traditional sources, such as reserve based lending (RBL) facilities, high-yield bond issuance or equity investment,” Fitch Rating said in early 2020 when this type of funding was brand-new and the pandemic hadn’t crushed oil demand yet.
“The newly issued transactions provide stable cash flow as depletion rates are fairly predictable depending on the age of the wells and the overall diversification,” the rating agency noted back in February 2020.
Even during the pandemic and the volatile prices in 2020 and 2021, oil and gas proved developed producing (PDP) securitizations showed much less volatility, “largely because of commodity price hedges and structural features of the securitizations,” credit ratings firm DBRS Morningstar said In May 2021.
Fitch Ratings stated in a statement that PDP securitization performed well during Covid despite volatility in oil prices and operator bankruptcy during the pandemic. report September 2021
“Required hedges on a majority of production volumes limit the effects hydrocarbon price fluctuations have on expected revenues. Additionally, PDP production has low breakeven costs, as the majority of capex costs have been incurred,” the credit rating agency said.
Booming Energy ABS Market
According to Guggenheim Securities data, the oil and natural gas asset securitization market will blossom in 2022. Energy ABS deals are expected to triple in value by 2022. Reuters. Since last year’s $1.2 billion, $3.9B has been sold by private firms to investors in PDP securitizations.
The single largest securitized financing of a U.S. producer was also this year. It was backed by a portion its producing assets since the PDP securitization funding agreements began three years ago.
This was an October transaction $750 million Securitized financing was provided for natural gas producer Jonah Energy LLC. The Denver-based firm is located in the Jonah Fields in Sublette County in Wyoming. Jonah Energy was able to close its first securitized financing transaction with $750million fully amortizing notes, backed partially by its producing assets.
Jonah Energy’s assets and operations are located within 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 the Jonah Field and surrounding area.
“I’m pleased to have completed a long-term financing transaction that completely pays down our RBL, which positions us with a strong balance sheet to pursue the significant drilling opportunities that we have on our acreage and strategic opportunities that may come our way,” Jonah Energy’s President and chief executive Tom Hart said.
Guggenheim Securities, which was the sole structuring advisor, book-running manager, and placement agent of the offering, said that Jonah Energy’s was the biggest asset-backed securitization completed 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 market,” said Anuj Bhartiya, Senior Managing Director in Guggenheim’s Structured Products Origination team.
PureWest Energy, Wyoming’s largest natural gas producer, successfully closed in August a second asset-backed securitization—after one last year—offering $365 million of asset-backed notes collateralized by a portion of PureWest’s producing natural gas assets. The transaction followed PureWest’s initial $600 million securitization in November 2021.
PureWest Energy expected to distribute the proceeds from the notes offering, together with excess cash on PureWest’s balance sheet, to its equity holders in the third quarter of 2022.
Oil and gas securities offerings could prove to be profitable for both producers and investors, Daniel Allison (energy finance partner at Sidley Austin LLP) wrote last year. Hart Energy. Investors have a relatively predictable cash flow profile of an oil and gas PDP, so they—and rating agencies—see production risk as “a tolerable variable,” Allison says. According to Allison, producers can securitize energy assets to diversify their capital or tap into an alternative market when other markets are less favorable.
By Tsvetana Paraskova for Oilprice.com
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