Private U.S. oil and gas producers are looking at a rising market for alternative funding as banks have stopped supporting oil and gas operations and other conventional forms of financing like equity stake or reserve-based lending (RBL) arrangements are drying up.
That is the asset-backed securitization (ABS) transaction known as the proved developed producing (PDP) securitization, whereby an oil or gas producer issues bonds. In other words, upstream producers use the money they make from producing oil and/or gas as security for the notes they sell to investors.
Asset Securitization for Energy
As many private producers want to diversify their finance sources, the first of these energy asset securitizations took place in 2019, but they have since grown in popularity.
When this type of funding was brand new and the pandemic hadn’t yet decimated oil demand, Fitch Ratings stated in early 2020 that securitizations supported by oil and gas assets helped broaden sources of funding for businesses that would customarily access capital from more conventional sources, such as reserve-based lending (RBL) facilities, high-yield bond issuance, or equity investment.
The rating agency stated back in February 2020 that the freshly issued deals provide reliable cash flow as decline rates are pretty predictable based on the age of the wells and the overall diversity.
Oil and gas proved developed-producing (PDP) securitizations showed significantly less volatility, even during the pandemic and the erratic prices in 2020 and 2021. This was largely due to commodity price hedging instruments and structural features of the securitizations, credit ratings firm DBRS Morningstar stated in May 2021.
Fitch Ratings stated in a research report in September 2021 that despite considerable fluctuation in oil and gas prices and operator bankruptcies during the pandemic, PDP securitization’s performance remained robust under COVID.
The majority of production quantities must be hedged, which reduces the impact of hydrocarbon price variations on anticipated revenues. Additionally, because the bulk of capital expenses have already been invested, PDP output has low breakeven costs, according to the credit rating agency.
Energy ABS Market is booming
According to statistics from Guggenheim Securities published by Reuters, the oil and gas asset securitization industry has truly taken off in 2022, with energy ABS deals tripling in magnitude from 2021. Private companies have sold $3.9 billion in PDP securitizations to investors so far this year, up from just $1.2 billion a year ago.
Since the PDP securitization funding arrangements started three years ago, this year also saw the single-largest securitization financing for a U.S. energy producer, backed by a percentage of its producing assets.
It was a $750 million securitized financing deal in October for natural gas producer Jonah Energy LLC, a business with headquarters in Denver that operates in the Jonah and Pinedale Fields of Sublette County, Wyoming. Providing $750 million in fully amortising notes secured by a portion of its producing properties, Jonah Energy was able to conclude its first securitized financing deal.
Over 2,400 producing wells and more than 130,000 net acres are part of Jonah Energy’s activities and assets, which are situated in Sublette County, Wyoming, in the Greater Green River Basin.
Tom Hart, president and CEO of Jonah Energy, said that he was pleased to have completed a long-term financing transaction that completely pays down the RBL, positioning them with a robust balance sheet to continue pursuing the substantial drilling possibilities that they have on their acreage and strategic opportunities that may come their way.
Jonah Energy’s asset-backed securitization was the largest one to date, according to Guggenheim Securities, which served as the offering’s sole structuring consultant, book-running administrator, and placement agent.
Anuj Bhartiya, Senior Managing Director in Guggenheim’s Structured Products Origination team, said that this ABS transaction, which is the largest PDP securitization finished to date and the third 144A that Guggenheim Securities has organised for the energy sector, tends to reflect the trust of industry leaders and market players in the appropriateness of energy-related ABS in the market.
After successfully completing one last year, PureWest Energy, Wyoming’s largest natural gas producer, completed another asset-backed securitization in August, selling $365 million in asset-backed notes that were secured by a portion of PureWest’s producing natural gas assets. The deal came after PureWest’s initial financing in November 2021 for $600 million.
PureWest Energy anticipated paying out its equity investors in the third quarter of 2022 with the proceeds from the note issue and any remaining cash on its balance sheet.
According to an article published in Hart Energy last year by Daniel Allison, an energy finance partner with the law firm Sidley Austin LLP, oil and gas securitization deals may be advantageous for both investors and producers. Production risk is seen as a manageable variable by investors and rating agencies because investors can foresee the cash flow pattern of an oil and gas PDP. When other markets are less favourable, producers can employ energy asset monetization to either vary their capital structure or access this alternate market, according to Allison.