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    January 2020IPAA Private Capital Conference

    Production Lending, LLC

  • 1 Production Lending, LLC

    Production Lending Overview

    Who We Are Target Transactions

    l Production Lending is a private lender focused on smaller transactions in the energy space

    l Since 2016, 19 debt transactions have been closed and more than $50 million of credit has been extended

    n 2019 average transaction of $6 million

    l Business is owned and operated by two energy professionals

    n Former energy investment bankers

    n $50+ billion in closed transaction volume

    n Equity investors in several projects

    l $2-15 million in transaction size

    l First lien security

    n Collateral of production, leases and minerals

    l Unique situations that are not bankable

    n Size

    n Minerals

    n Concentration

  • 2 Production Lending, LLC

    The Cure for Low Prices is Low Prices

    Prices fall below production cost due

    to oversupply Supply increases to meet and eventually

    exceed demand

    Money rushes back into the sector and production

    increases

    Investment in new projects falls as no

    investors are making money

    Shortages emerge as production from existing projects

    declinesPrices rise as a result of the

    demand/supply imbalance

    Commodity Price

    Lifecycle

    2014-2017

    2012-2014 2017-2019

    2019-2020?

    2020-2022?

    2010-2014

  • 3 Production Lending, LLC

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    Conventional Shale

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    Conventional Shale

    US Crude Oil and Natural Gas Historical Production

    Source: EIA. Note: Natural gas represents marketed production.

    US Crude Oil Production (mmbbl/d) US Natural Gas Production (Bcf/d)

    The industry’s heavy focus on shale has resulted in large increases to US production

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    Conventional Shale

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    Conventional Shale

  • 4 Production Lending, LLC

    2014 Well Productivity Forecast Results

    Source: Rystad Energy.

    US shale oil and gas wells drilled in 2014 have underperformed expectations by ~15% on average

  • 5 Production Lending, LLC

    Energy Capital is Rotating away from from Oil and Gas to Renewables

    Source: Bloomberg, public filings. Note: Data shown through 9/30/19.

    Questions around US shale economics and a focus on green energy have led many investors to move capital away from traditional oil and gas investments

    ($ in billions)

    $0

    $25

    $50

    $75

    $100

    $125

    $150

    2013 2014 2015 2016 2017 2018 YTD 2019

    Upstream HY Bond/Equity Issuance Green Energy Bond Issuance

  • 6 Production Lending, LLC

    Public E&P Company Cash Flows vs Capex

    Source: EIA, Spears Drilling and Production Report, Baker Hughes. Note: Does not include acquisitions or divestments.

    The Shale Revolution saw companies outspend cash flow by billions of dollars every year; Has newfound capital disciple finally been instilled in 2019?

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    Operating Cash Flow Capex

    4% 12% 17% 53% 21% 22% 5% 0%34% 29%Outspend (%)

    Outspend (billions) $3 $11 $17 $30 $8 $12 $4 $0$30 $31

    2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2019

  • 7 Production Lending, LLC

    $0.0

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    Acquisition Price vs PDP PV

    Note: Data represents 2019 transactions evaluated by PL where an LOI or other agreement was in place to purchase assets.

    As acquisition prices decline, PDP value becomes highly discounted; Desperation to sell or are buyer’s not accounting for cost and P&A properly?

    Acquisition Closed LOI Executed / No Close

    PV-0 PV-10 PV-20 PV-30 PV-40

    PL Focus Area

  • 8 Production Lending, LLC

    0

    3,000

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    Purchase Price PDP PV-10

    Case Study: Development Loan

    Value Gain ($000’s)

    Structure: Development Loan

    Facility Size: $7,000,000

    Loan Repayment: CF Sweep + Bullet Payment

    Tenor: 1 year

    Lender MOIC: ~1.1x + ORRI

    l Project consisted of a non-operated interest located in the Uintah Basin

    l Management identified and negotiated the transaction in December 2018 when oil prices were ~$45/bbl

    l Management raised ~30% equity for the purchase, but still required a debt lender to fund the remaining 70%

    l Borrower had a short fuse on the PSA

    l Production Lending was able to negotiate, close and fund the transaction within 10 days

    l Transaction was structured to give Borrower the flexibility to refinance with conventional bank debt at any time

  • 9 Production Lending, LLC

    Case Study: Minerals Acquisition Loan (Currently Outstanding)

    Structure: Acquisition Loan

    Facility Size: $7,500,000

    Loan Repayment: Bullet at Maturity

    Tenor: 6 months

    Lender MOIC: ~1.1x

    l $7.5 million acquisition facility to expand company’s existing mineral interest portfolio

    n $4 million drawn within one month of close

    l Management contributed $10 million in existing mineral assets

    n Focus areas are Permian Basin and Eagle Ford

    l Loan is secured by all assets of the borrower

    l Once fully drawn, the Facility will help the company to grow more than 70% without any need to raise additional equity capital

    Minerals Market Opportunity

    86%

    14%

    Unnatural Holders Long-Term Holders

  • 10 Production Lending, LLC

    $0

    $75

    $150

    $225

    $300

    At Transaction Close Current

    Case Study: PDP Acquisition

    l Operator approached Production Lending to help finance a $3.5 million PDP acquisition

    n Operator had $1 million in equity to contribute

    n Timing of effective date and closing acted as a reduction in purchase price

    n Needed $1.3 million in debt to complete acquisition

    l Since taking over the asset, the operator has completed the following projects:

    n Reduction in monthly LOE

    n Restoring production on one well

    n Installation of artificial lift to arrest decline

    l Current run-rate free cash flow is ~$3 million

    Monthly Cash Flow ($000’s)

    Structure: Acquisition Term Loan

    Facility Size: $1,350,000

    Loan Repayment: Fully Amortizing

    Tenor: 2 years

    Lender MOIC: ~1.3x

  • 11 Production Lending, LLC

    What Makes a Strong Borrower?

    l The challenge of this space is trying to partner with the right people on the right projects

    l This is what we look for:

    n Industry experts; knowledge of oil and gas; track record of success

    n Good reputation and references

    n Borrowers who invest their own capital with us

    – Alignment of risk is essential

    n Projects that make sense

    – Achievable upside

    – Contiguous positions

    – Healthy operating margins

    n Updated data, financials & development plans

    – Borrowers who are organized

  • 12 Production Lending, LLC

    Contact Information

    Production Lending, LLC 10497 Town and Country Way, Suite 700

    Houston, TX 77024 (832) 895-1086

    info@productionlending.com

    Ryan W. Childs Principal Production Lending (978) 828-1788 (direct) rw@productionlending.com

    Abhishek Kumar (AK) Principal Production Lending (512) 853-0069 (direct) ak@productionlending.com