1. What is a VPP?
A flexible, non-recourse way to
monetize future production for
cash today
Volumetric Production Payments
(“VPP”)
Contact Garrett Mayer garrett@pc-funds.com 214-615-1525 Office
• A VPP is a transaction whereby a seller agrees to deliver a
specified hydrocarbon volume to the buyer over a period of
time in exchange for an upfront cash payment
• A VPP is conveyed through the sale of a limited term
overriding royalty interest (ORRI) in a specific group of
leases
• When the total volume has been delivered to the buyer the
VPP terminates and the seller interest returns back to the
prior NRI
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• VPPs can be used to monetize a portion of the future value of existing reserves enabling the producer to raise capital while keeping
control over the assets and maintaining the upside from enhancements to reserves and production
• The VPP Seller receives cash consideration as a purchase price, which is fully funded at close
• The proceeds of a VPP can be used by the VPP Seller to:
• pay down debt
• increase exploration and development spending
• fund acquisitions
• During the term, the VPP Buyer is entitled to receive scheduled production volumes from specified lease interest as a royalty
interest not subject to operating expenses
 Only a portion of the VPP Seller’s future production volumes
are dedicated. A certain percentage of projected volumes
remain with the VPP Seller to cover expenses and to provide
a “cushion”
 A higher number of wells included mitigates concentration
risk and allows for a larger purchase price
 VPP volumes scale down over time to match decline curve
 In event monthly or term volumes fall below contractual
volume, “make-up” provisions require additional volumes
be delivered to the VPP Buyer
VPP Mechanics
Benefits
• Less constraining capital than bank loans
• Non-recourse – no financial covenants
• No personal or corporate guarantees
• Can close much faster
• Lower cost than selling equity
• No change in operational control
• Tax efficient – payment generally not subject to
taxation upon receipt
• Reserve and production risk shifted to VPP Buyer
• VPP is recognized as a separate property interest
• VPP proceeds can be used to acquire other
producing reserves or additional acreage
• VPP Seller retains 100% of assets future upside
potential
Criteria
• PDPs need to have predictable production profile –
larger number of wells allow for a greater purchase
price
• Reserve reports on PDP – internal reports may be
acceptable for initial quotes
• Documentation
• Purchase & Sale Agreement
• Assignment of Limited Term Overriding
Royalty Interest
• Marketing Agreement
• Division Orders, or
• Lockbox Arrangement
• Buyer is responsible for its own hedging
• $1-$20 Million (larger sizes possible)
Production
Time
Production to VPP Buyer PDP Production New Production