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Click to edit Master subtitle style Click to edit Master title style January 2020 IPAA Private Capital Conference Production Lending, LLC
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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 $2-15 million in transaction size
l First lien security
n Collateral of production, leases and minerals
l Unique situations that are not bankable
n Size
n Minerals
n Concentration
2 Production Lending, LLC
The Cure for Low Prices is Low Prices
Prices fall below production cost due
to oversupplySupply increases to meet and eventually
exceed demand
Money rushes back into the sectorand production
increases
Investment in new projects falls as no
investors are making money
Shortages emerge as production from existing projects
declinesPrices rise as a result of the
demand/supply imbalance
Commodity Price
Lifecycle
2014-2017
2012-2014 2017-2019
2019-2020?
2020-2022?
2010-2014
3 Production Lending, LLC
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Conventional Shale
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Conventional Shale
US Crude Oil and Natural Gas Historical Production
Source: EIA.Note: Natural gas represents marketed production.
US Crude Oil Production (mmbbl/d) US Natural Gas Production (Bcf/d)
The industry’s heavy focus on shale has resulted in large increases to US production
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Conventional Shale
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4 Production Lending, LLC
2014 Well Productivity Forecast Results
Source: Rystad Energy.
US shale oil and gas wells drilled in 2014 have underperformed expectations by ~15% on average
5 Production Lending, LLC
Energy Capital is Rotating away from from Oil and Gas to Renewables
Source: Bloomberg, public filings.Note: Data shown through 9/30/19.
Questions around US shale economics and a focus on green energy have led many investors to move capital away from traditional oil and gas investments
($inbillions)
$0
$25
$50
$75
$100
$125
$150
2013 2014 2015 2016 2017 2018 YTD2019
UpstreamHYBond/EquityIssuance GreenEnergyBondIssuance
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?
$0
$50
$100
$150
1 2 3 4 5 6 7 8 9 10
OperatingCashFlow 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
$10.0
$20.0
$30.0
0 10 20 30 40
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
6,000
9,000
12,000
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PurchasePrice PDPPV-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%
UnnaturalHolders Long-TermHolders
10 Production Lending, LLC
$0
$75
$150
$225
$300
AtTransactionClose 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, LLC10497 Town and Country Way, Suite 700
Houston, TX 77024 (832) 895-1086
Ryan W. ChildsPrincipalProduction Lending(978) 828-1788 (direct)[email protected]
Abhishek Kumar (AK)Principal Production Lending(512) 853-0069 (direct)[email protected]
