As banks have pulled back from financing oil and gas operations and other traditional sources of financing such as equity investments or reserve-based lending (RBL) facilities dry up, private US oil and gas producers are seeing a booming market for alternative financing.
It is the documented, developed producing (PDP) securitization, where an oil or gas producer issues bonds in a securitization transaction (ABS). In other words, upstream producers use the cash from 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 201[ads1]9, but it has rapidly gained popularity over the past year as many private producers look to diversify their funding sources.
“Securitizations backed by oil and gas assets help to diversify funding sources for companies that would typically access capital from more traditional sources, such as reserve-based lending facilities (RBL), high-yield bond issuance or equity investments,” says Fitch Rating. so in early 2020 when this type of financing was brand new and the pandemic had not yet crushed oil demand.
“The recently issued transactions provide stable cash flow as the depletion rates are quite predictable depending on the age of the wells and overall diversification,” the rating agency said back in February 2020.
Even during the pandemic and volatile prices in 2020 and 2021, oil and gas producing (PDP) securitizations showed much less volatility, “primarily due to commodity price hedges and structural features of the securitizations,” credit ratings firm DBRS Morningstar so in May 2021.
The performance of PDP securitizations remained resilient 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.
“Required hedges on a majority of production volumes limit the effects of hydrocarbon price fluctuations on expected revenues. In addition, PDP production has low breakeven costs, as the majority of investment costs have been incurred,” the rating agency said.
Booming energy ABS market
In 2022, the oil and gas securitization market has really boomed, with energy ABS deals tripling in value from 2021, according to data from Guggenheim Securities cited by Reuters. So far this year, private firms have sold to investors $3.9 billion in PDP securitizations, up from just $1.2 billion last year.
This year also saw the largest single securitization financing for a US energy producer, backed by a portion of its producing assets, since the PDP securitization deals began three years ago.
There was a transaction in October for 750 million dollars secured financing for natural gas producer Jonah Energy LLC, a Denver-headquartered company that operates the Jonah and Pinedale fields in Sublette County, Wyoming. Jonah Energy completed its first securitized financing transaction by offering $750 million of fully amortizing notes backed by a portion of its producing 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 in the Jonah field and surrounding area.
“I am pleased to have completed a long-term financing transaction that fully pays off our RBL, positioning us with a strong balance sheet to pursue the significant drilling opportunities we have on our acreage and strategic opportunities that may come our way,” Jonah Energy’s President and CEO director Tom Hart said.
Guggenheim Securities, which was the sole structuring adviser, book-running manager and placement agent for the offering, said Jonah Energy was the largest securities-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 secured by a portion of PureWest’s producing natural gas assets. The transaction followed PureWest’s $600 million initial public offering in November 2021.
PureWest Energy expected to distribute the proceeds from the note offering, along with excess cash on PureWest’s balance sheet, to its shareholders in the third quarter of 2022.
Oil and gas securitization offerings can be beneficial to both investors and producers, Daniel Allison, energy finance partner with law firm Sidley Austin LLP, wrote last year in Hard energy. Investors have a relatively predictable cash flow profile for an oil and gas PDP, so they — and rating agencies — see production risk as “a tolerable variable,” Allison says. The producers, in turn, can use the securitization of energy assets to either diversify their capital structure or take advantage of this alternative market when others are less favorable, according to Allison.
By Tsvetana Paraskova for Oilprice.com
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