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Oil & Gas ProgramsThis 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 & AssociatesPanelists: Brett Evans, Hull, Evans, Kob LLP; Shawn Smith, FactRight LLC; Gail Schneck, Buttonwood Investment Services
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Oil & Gas Program
and Sponsor Evaluation
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
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
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
Every sponsor has the best deal
Most promise good returns . . . but . . .
What percentage deliver? Our goal today: To give you effective program evaluation tools used by experienced professionals
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?
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
What separates the better performers?
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
How to evaluate the liability exposure
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
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
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?
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
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
Wrapping it up . . . .
Questions????