Oil & Gas Programs
This session is a follow up to the introduction to private oil and gas investments given last October. The focus will be on recent Reg. D activity in leases, drilling, and royalty acquisitions. Discussion will also include opinions as to how this asset class differs from other alternatives and how it continues to deliver competitive economic benefits for investors. Additional topics include: Recent trends/opportunities, how to separate the excellent companies from the chaff, how to evaluate opportunities and implement due diligence best practices, liquidity considerations and exit plan strategies.
Moderator: Brad Updike, Mick & Associates
Panelists: Brett Evans, Hull, Evans, Kob LLP; Shawn Smith, FactRight LLC; Gail Schneck, Buttonwood Investment Services
3. Oil & Gas Reg. D Activity
Approx. $700 mm raised annually in syndications
30-plus sponsors raising capital through Reg. D for
leases, drilling, and royalty acquisitions
4. So many offerings . . . yet
So little time to review, digest and decide!
Not much competition seen in royalties/production
. . .But a lot of drilling program alternatives
5. Challenges:
RN 10-22 reminds us that due diligence goes beyond the sponsor
Background review (measures character)
Financial statement review (measures going concern risk)
Can affiliates affect the fund business? (fairness/longevity)
Pro forma analysis (risk vs. return)
Past performance (ability to deliver)
Outside science opinions (ability to deliver/competitiveness)
Trust but verify!
Push and pull
7. Most promise good returns . . .
but . . .
What percentage deliver?
Our goal today:
To give you effective program evaluation tools
used by experienced professionals
8. What are the different program types?
Drilling, Production, Hybrid
What are the different oil & gas interests?
Minerals, Working Interests,
Royalties
The importance of screening
How do we screen programs?
9. What separates the better performers?
Skin in the game
Area-specific knowledge
They run economics
Seasoned management that’s been through hard
times
Balance in finance, prospect review and field
operations
10. How to evaluate the liability exposure
What program structures mitigate liability
Drilling—operational risk
Royalties—non-operating participation
WI/Production—operating risk, but less
than new drilling
What do we look for to help protect your investors
in our due diligence?
Insurance
Financial statement review
GP conversion feature
Background checks
Visits to the field
Interviews with industry partners
11. Oil Spot Price $107.40 (3/9/12)
Gas Spot Price $2.21 MMBTU (3/9/12)
NGLs move with oil generally
Is the sponsor moving from natural gas to
Oil/NGL projects?
Ability to participate meaningfully
Keeping the operators honest
Understanding the economics
12. Assessment of the economic return
Basic components of the model
Reserves (experts/research)
Oil/gas pricing (SEC vs. NYMEX futures)
Costs (LOE, taxes, royalty burden)
Cap-ex (load/carry adjusted)
Outputs
ROI, payout, ROR
Use of experts and authorities
Risk vs. return drives the analysis
13. Program viability
Evaluating sponsor financial viability
Asset growth or decline
Liquidity
Leverage
Pattern of earnings
Altman Z-Test (bankruptcy risk)
Special issues with start-ups
Limited capitalization
Can they stay in business
Chicken and egg dilemma-can they raise
money?
14. Key investor protections from organizational
document review
Manager removal (consider BK & receivership issues)
Debt limits
GP/LP conversion feature (drilling)
Affiliate transactions/loans
Reporting obligations
Commingling/separate bank accounts
Reasonable indemnity
Dilution risk
Title of program assets
15. Validating the sponsor's performance
Investor/JV Partner interviews
B/D interviews
Reserve data
Production database research
Program level financials
Spot-testing of accounting data
PSAs and closing statements