Business

A new type of oil and gas financing is booming


As banks withdraw funding for oil and gas operations and other traditional sources of financing such as equity investments or reserve-based lending (RBL) facilities are drying up, oil producers U.S. private gas is looking for a booming market for alternative capital.

It is a proven developmental production securitization (PDP), in which an oil and gas producer issues bonds in an asset-based securitization (ABS) transaction. In other words, upstream producers use the cash from their oil and/or gas production as collateral for debts placed with investors.

Securitization of energy assets

The first such securitization of energy assets took place in 2019, but it has rapidly gained popularity over the past year as more private producers seek to diversify their capital sources.

“Securitization backed by oil and gas assets helps diversify funding for companies that normally access capital from more traditional sources, such as a reserve-based lending facility (RBL), issue high-yield bonds or invest in stocks,” Fitch Rating speak in early 2020 when this type of funding was new and the pandemic had not yet disrupted oil demand.

“Newly issued transactions provide steady cash flow as the rate of depletion is predictable depending on the age of the well and the overall level of diversification,” the rating agency noted in February 2018. 2020.

Even in times of pandemic and volatile prices in 2020 and 2021, petrochemical securitizations have demonstrated much less volatile production securitization (PDP) operations, “largely due to commodity price hedges and structural features of securitization,” credit rating agency DBRS Morningstar speak in May 2021.

Fitch Ratings says the performance of PDP securitization has remained stable during Covid, despite high volatility in oil and gas prices and operator bankruptcies during the pandemic. report in September 2021.

“Mandatory hedge measures for the majority of production volumes will limit the impact of hydrocarbon price movements on projected revenue. In addition, the production of PDP has a low break-even cost as most of the investment costs are incurred,” the credit rating agency said.

Booming energy ABS market

In 2022, the oil and gas asset securitization market has really blossomed, with energy ABS transactions tripling in value compared to 2021, according to data from Guggenheim Securities cited by Cointelegraph. Reuters. So far this year, private companies have sold investors $3.9 billion in PDP securitization, up from just $1.2 billion last year.

This year also saw the largest securitization funding for a U.S. energy producer, backed by a portion of its productive assets, since securitization funding deals. PDP started three years ago.

It was an October transaction for 750 million USD financing the securitization of natural gas producer Jonah Energy LLC, a Denver-based company with operations in Jonah and Pinedale Fields in Sublette County, Wyoming. Jonah Energy has successfully closed its first securitized financing transaction by offering $750 million in fully amortized notes backed by a portion of its manufacturing assets.

Jonah Energy’s assets and operations are located in the Greater Green River Basin in Sublette County, Wyoming, and include more than 2,400 production wells and more than 130,000 net acres located in Jonah Field and the surrounding area.

“I am pleased to have completed a long-term financing that pays off our RBL entirely, which leaves us with a strong balance sheet to pursue the significant drilling opportunities we have across the globe. acreage and strategic opportunities could come our way,” said Tom Hart, President and CEO of Jonah Energy.

Guggenheim Securities, the offering’s structuring advisor, bookkeeper and sole placement agent, said that Jonah Energy’s is the largest asset-based securitization completed to date.

“This ABS transaction, which represents the largest PDP securitization completed to date and is the third 144A transaction Guggenheim Securities has structured for the energy industry, reflects the confidence of industry leaders and market participants on the suitability of energy-related ABS in the market,” said Anuj Bhartiya, Senior Managing Director in Guggenheim’s Structured Product Initiation group.

PureWest Energy, Wyoming’s largest natural gas producer, close successfully in August, the second asset-backed securitization—after last year’s securitization—offers $365 million in partially-collateralized bonds PureWest natural gas producer. The transaction follows PureWest’s initial $600 million securitization in November 2021.

PureWest Energy expects to distribute proceeds from the bond offering, along with excess cash on PureWest’s balance sheet, to shareholders in the third quarter of 2022.

Daniel Allison, energy finance partner at law firm Sidley Austin LLP, wrote last year that petrochemical securitization services can benefit both investors and producers. Hart energy. Investors have a relatively predictable cash flow profile for an oil and gas PDP, so they—and rating agencies—consider production risk as “an acceptable variable,” Allison said. . For their part, producers can use energy asset securitization to 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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