As banks have pulled back from funding oil and gas operations and other traditional sources of financing such as equity investment or reserve-based lending (RBL) facilities are drying up, private U.S. oil and gas producers are looking at a booming market for alternative fundin.
That’s the proved developed producing (PDP) securitization, in which an oil or gas producer issues bonds in an asset-backed securitization (ABS) transaction. In other words, upstream producers use the cash from their oil and/or gas production as collateral for the notes placed with investors.
Energy Assets Securitization
The first such energy asset securitization took place in 2019, but it has quickly gained popularity over the past year as many private producers look to diversify their funding sources.
“Securitizations backed by oil and gas assets help diversify funding sources for companies that would typically access capital from more traditional sources, such as reserve based lending (RBL) facilities, high-yield bond issuance or equity investment,” Fitch Rating said in early 2020 when this type of funding was brand-new and the pandemic hadn’t crushed oil demand yet.
“The newly issued transactions provide stable cash flow as depletion rates are fairly predictable depending on the age of the wells and the overall diversification,” the rating agency noted back in February 2020.
Even during the pandemic and the volatile prices in 2020 and 2021, oil and gas proved developed producing (PDP) securitizations showed much less volatility, “largely because of commodity price hedges and structural features of the securitizations,” credit ratings firm DBRS Morningstar said in May 2021.
The performance of PDP securitization remained resilient during Covid, despite high volatility in oil and gas prices and operator bankruptcies during the pandemic, Fitch Ratings said in a report in September 2021.
“Required hedges on a majority of production volumes limit the effects hydrocarbon price fluctuations have on expected revenues. Additionally, PDP production has low breakeven costs, as the majority of capex costs have been 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 deals tripling in value from 2021, according to data from Guggenheim Securities cited by Reuters. So far this year, private firms have sold to investors $3.9 billion in PDP securitizations, up from just $1.2 billion last year.
This year also saw the single-largest securitized financing for a U.S. energy producer, backed by a portion of its producing assets, since the PDP securitization funding deals began three years ago.
That was a transaction in October for $750 million securitized financing for natural gas producer Jonah Energy LLC, a Denver-headquartered firm operating in the Jonah and Pinedale Fields in Sublette County, Wyoming. Jonah Energy successfully closed its first securitized financing transaction by offering $750 million fully amortizing notes backed by a portion of its producing assets.
Jonah Energy’s assets and operations are located within the Greater Green River Basin in Sublette County, Wyoming, and consist of over 2,400 producing wells and over 130,000 net acres located in the Jonah Field and surrounding area.
“I’m pleased to have completed a long-term financing transaction that completely pays down our RBL, which positions us with a strong balance sheet to pursue the significant drilling opportunities that we have on our acreage and strategic opportunities that may come our way,” Jonah Energy’s President and chief executive Tom Hart said.
Guggenheim Securities, which was the sole structuring advisor, book-running manager, and placement agent of the offering, said that Jonah Energy’s was the biggest asset-backed securitization completed to date.
“This ABS transaction, which represents the largest PDP securitization completed to-date and the third 144A that Guggenheim Securities has structured for the energy sector, reflects the confidence of industry leaders and market participants in the suitability of energy-related ABS in the market,” said Anuj Bhartiya, Senior Managing Director in Guggenheim’s Structured Products Origination team.
PureWest Energy, Wyoming’s largest natural gas producer, successfully closed in August a second asset-backed securitization—after one last year—offering $365 million of asset-backed notes collateralized by a portion of PureWest’s producing natural gas assets. The transaction followed PureWest’s initial $600 million securitization in November 2021.
PureWest Energy expected to distribute the proceeds from the notes offering, together with excess cash on PureWest’s balance sheet, to its equity holders in the third quarter of 2022.
Oil and gas securitization offerings could be beneficial to both investors and producers, Daniel Allison, energy finance partner with law firm Sidley Austin LLP, wrote last year in Hart Energy. Investors have a relatively predictable cash flow profile of an oil and gas PDP, so they—and rating agencies—see production risk as “a tolerable variable,” Allison says. Producers, for their part, can use energy asset securitization to either diversify their capital structure or tap this alternative market when others are less favorable, according to Allison.