Challenges in the Oil & Gas sector

Published by

Sep 3, 2019

Atrato Advisors has witnessed investors abandon the traditional energy sector in public and private markets across mid-stream and up-stream businesses. With the general investor retreat from these markets, certain managers have sought the opportunity to purchase or finance upstream assets that are positively cash flowing based on current production and where Proven Developed Producing reserves cover the majority, if not all, of their investment. These assets have CapEx needs to expand production well below existing cash flow. While many lending strategies focus on the best acreage in the best basins, some of the equity investors are focusing on non-core assets that are being sold by E&P companies as they consolidate around their core assets. The producing assets in both strategies tend to be established, have well-understood decline rates and significant remaining development upside based on barrels in the ground. We have seen both lenders and equity investors looking to protect themselves by having the companies hedge forward production prices aggressively, emphasizing that commodity prices do not need to rise for attractive IRRs to be realized [lenders hedging for the life of their loan (3-5 years), equity buyers hedging for 6 years]. Lenders are protecting themselves through amortization schedules and excess cash flow sweeps while equity investors are seeking to de-risk investments by distributing cash flow from the onset. The equity investments carry some advantage for taxable investors as well because depreciation can be realized over seven years. This area of credit markets seems to be one of the few where the supply and demand of capital is strongly in favor of the lender, allowing them to negotiate on terms and covenants and choose to lend to experienced management teams with attractive collateral/cash flow characteristics.


Articles authored by Martin Signer

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