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State of the Market and a Path ForwardEnerCom DallasFebruary 27, 2019
Austin Elam, PartnerKraig Grahmann, Partner
© 2019 Haynes and Boone, LLP
A Path Forward for A&DCase studies of alternative financing structures to facilitate A&D and Development
Austin Elam
© 2019 Haynes and Boone, LLP
A&D Market – More Deals than Dollars
§ Perhaps near $40B of U.S. upstream assets on the block (source: drillinginfo)
§ Lack of liquidity has contributed to a historically slow A&D cycle, notwithstanding significant uptick in M&A activity.
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Favorable Environment for DrillCos and VPPs
§ Off balance sheet liquidity, with limited recourse, is at a premium
§ DrillCo – a drilling joint venture between a Producer and a Capital Provider
§ Not a company or jointly-owned entity – a “financial” farmout agreement
§ Capital Provider agrees to fund Producer’s drilling of wells in exchange for negotiated “Before Payout” and “After Payout” returns and interests
§ VPP and Royalty Interests
§ Frequently, an interest in limited fixed quantity or term, free of production expense
§ Dollar or Volume denominated, with pricing agreed upfront
§ Prepaid (or “zero dollar”) Swap Transactions
§ Capital provider is the payor on a $0 swap (paying to the producer the difference between the then current commodity price, discounted to NPV)
§ Producer pays to capital provider an equivalent quantity at prevailing strip prices
§ Unlike DrillCos and VPPs, recourse similar to that of a debt creditor and could be classified as “Indebtedness”
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Utilizing an NPI to Finance an Acquisition§ For a PDP-heavy asset package, through the creation of an “Unrestricted Subsidiary”
can utilize NPI financing to reduce equity/debt capital outlay
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Utilizing a DrillCo to Aid an Acquisition
• For an asset package with substantial DUCs or PUDs
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Utilizing a VPP to Finance an Acquisition
• Acquisition of long-lived assets with a strong PDP base, with significant workover and secondary operations expected
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Trends in 2019 A&D TransactionsKraig Grahmann
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Investing Public Not Buying Energy
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Private Equity Energy Investments – Change to Model?
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A&D Expectations for 2019
• Fewer massive “land grabs” or acquisitions of “drilling inventory”• Dispositions of “noncore” and “less core”
• Alternative financings
• Private equity looking for exits
• Transactions supporting G&A synergies
• A&D transactions that supporting execution strategies:
– Acreage swaps and exchanges
– Acquisitions of minerals underlying core leases
– Ancillary assets – water, midstream
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Haynes and Boone Energy Roundup
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CONTACT INFORMATION
Austin ElamPartnerChair – Oil & Gas Practice Group
HOUSTON
[email protected] T +1 713.547.2122 F+ 1 713.236.5430
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Kraig GrahmannPartnerChair – Energy Finance Practice Group
HOUSTON
[email protected] T +1 713.547.2048F+ 1 713.236.5469
© 2019 Haynes and Boone, LLP
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