Financial picture brightens for U.S. oil and gas producers

Just a year ago, sources of capital for US oil and gas producers were extremely scarce and had only a premium. Today, with oil prices mostly hovering around $100 a barrel, the outlook is dramatically different. Now, producers have many options to raise the cash they need to ramp up operations or refinance to reduce debt repayments.

While this is a good position, producers are now faced with tough decisions as to which is the best option or whether it makes sense to have a diverse set of investors providing capital. It is important to act with urgency as long as these sources of capital are available so that plans for growth, development or repositioning can be put in place and financing secured when market conditions are favourable. It is also important to negotiate terms that allow the business to perform well despite market fluctuations and periods of uncertainty.

Faced with many choices, a company must think about its own fundamentals and objectives. Many debt financing opportunities have different maturities and repayment options. Additionally, some lenders will tie up free cash flow for required debt repayments, while others may allow more flexibility on repayment before maturity. Some may allow a borrower to pay dividends to investors with available cash from operations. In many cases, it is possible to combine more than one of these sources of capital to obtain sufficient financing for the long-term budget of the oil and gas producer.

Among the new sources of financing that have emerged during difficult times in recent years for oil and gas producers are credit funds, which are lenders but not typical big box banks. These lenders tend to focus on more specific business profiles rather than trying to service entire industries. Credit funds absorbed some of the senior secured lending market share as borrowers and institutional lenders dried up. Many of these alternative lenders were successful in identifying high performing borrowers who were unreasonably hampered by general market sentiment.

Another new source of capital concerns the securitization of producing wells. By aggregating many oil and gas producing assets and hedging price exposure, these structures can achieve investment grade ratings for notes backed by oil and gas assets, and they attract a new class of investors. Presidio Petroleum of Fort Worth, Diversified Energy of Birmingham, Alabama, and PureWest of Denver have all recently announced securitization transactions.

This new product has become a useful tool to replace all or part of an existing loan with a large traditional bank. Securitizations also often provide sufficient proceeds to fund growth or pay dividends to shareholders. In addition, these companies reap the benefits of any performance improvements or unhedged pricing of securitized assets.

Cash (flow) is king

A common theme, however, to both traditional sources of capital and new entrants, has been an emphasis on free cash flow – cash after expenses and a demand for more discipline in the generation of excess cash. Independent producers have heard the message and understood the mission. Many public companies have cleaned up their balance sheets to generate more cash and, in many cases, to pay dividends to shareholders.

At the same time, many oil and gas companies were able to increase their investments by issuing rated notes and bonds, while not being prime issuers. Although investor appetite for these products has been intermittent this year, companies with the strongest balance sheets have been able to raise funds with these products.

Today, with rising commodity prices and recent results from most producers showing lower costs and stronger cash flow, many traditional sources of capital are returning to the sector. Reserve-based lending from banks and other traditional institutions – credit based on proven oil and gas reserves – has rebounded in recent months, and high-yield issuance has been robust for financially responsible producers over the past few months. last quarters.

Meanwhile, new and creative capital solutions remain available. These alternative lenders continue to be opportunistic and securitization structures are becoming more common and easier to execute. At the same time, investments in state-owned oil and gas companies have performed well in recent quarters, helped by sound fundamentals and rising prices. For now, however brief, the outlook looks much better than it has in a few years.

Daniel Allison is an energy and global finance attorney in the Houston office of Sidley Austin LLP.

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