SPE Meeting â Geneva
Titre de la présentation
SPE Meeting – Geneva – 18.06.2013 Investing and Financing Independent Oil&Gas Companies – Welcome to a changing world !
Philippe W Michel 18 June, 2013
SPE Meeting Geneva
SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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E&P Cycle
Upstream Oil & Gas Financing
Seismic studies Target identification
Exploration wells drilling
Financing sources
Business Angels
Junior Debt
Appraisal wells drilling / delineation
Field life extension EOR Redevelopment Decommissioning
Field development
Private Equity Mezzanine Financing Development Financing
Senior Debt
Reserve Based Lending Pre-Export Financing
ECM
DCM Time
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Upstream Oil & Gas Financing
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SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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Private Equity – E&C Capital
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Private Equity – E&C Capital
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Private Equity – E&C Capital
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Private Equity – Methodology 200 opportunities per year coming from (i) Brokers, (ii) Bank officers, (iii) Team Network First Screening done. 70% of the time, deal is rejected at this stage – do not fit our requirements. First Introduction - Teaser
If screening ok, then NDA or CA is signed => Analysis of confidential information. Technical due diligence peformed. If ok, then meeting of the management team.
NDA /CA
Due Diligence
If due diligence ok, discussion on pre-money valuation.
Deal If pre-money valuation ok, then deal.
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Private Equity – Business Cycle
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Private Equity – Expected Return
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SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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Upstream Oil & Gas Financing Project Finance Fixed Income Securitization
Facility Amount :$ 300 mm Committed Amount :$ 100 mm
Reserves Based Lending Acquisition Finance Development Finance Pre-export Financing Trade Finance Construction Risk
Construction Risk Undrawn Amount Commitment fees : 40% of the margin
Reservoir Risk
Drawn Amount Margin : LIBOR + 250 -700 bps
Political Risk
Upfront fees : 25 to 250 bps
Reservoir Risk
Performance Risk
Price Risk Short Term up to 3 Years
Mid term up to 7 Years
Long Term up to 20 years
Increased Margin 18/06/2013
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Upstream Oil & Gas Financing
• Screening phase : Requirement to identify deal breakers and key technical risks to be assessed during the due diligence. • Due diligence including Third party work and assessment of company’s opinion. • Sites visit to allow reality check and assessment of operating capabilities of the company. • Conservative assumptions to be retained. • Sensitivities analysis to be conducted. Always consider Risks vs. Rewards !
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Upstream Oil & Gas Financing
Production Profiles • Based always on Proved Reserves. Only reserves ‘On Production’ or ‘Approved for Development’ are considered. • Check Source and Uses. • Management’s capability to deliver will drive our willingness to consider some PUD. Oil/Gas Prices • Apply ‘Price Deck’. Long Term Brent price of circa. $70 /bbl. (about 70% of Forward prices) OPEX&CAPEX • Usually from Client with a QC based on historical costs. Sensitivity to be run systematically, but in general second order issue.
Key Risk remains underground !
Taxes • Use taxes as currently defined • Market Intelligence to foresee future changes (… quite challenging). Run sensitivities in case of doubts. Technical Covenants • Usually LLCR the constraining factor (1.3 – 1.4 in general). • Reserves Tail at maturity : 25%. Gives headroom in case of restructuring.
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Conventional Oil Development : Onshore Russia RUS Oil&AS(Russia / Timan Pechora) – 10’000 bopd • 36 oil producers / 9 water injectors from 8 pads • Sandstones – good reservoir rocks – 3 reservoirs • Light Oil (37 deg API) • Artificial lift via ESP • Recovery Factor expected > 40% • Ultimate reserves > 110 millions barrels • CAPEX low < $2/bbl • A well cost is the range of $2 to $3 millions • Field OPEX low < $4/bbl • Export via Transneft Climate - Export
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Conventional Oil Development : Onshore Russia RUS OIL&GAS COMP Oil Price
70
Production Revenue Petroleum Taxes Export Custom Duties
bopd $mm $mm $mm
OPEX CAPEX Corporate Taxe CASH FLOW NPV Field Life NPV Loan Life FLCR LLCR Borrowing Base Amount Facility Amount
$mm $mm $mm $mm $mm 1.5 1.3
$/bbl 2013 10000 256 -47.7 -113.2 94.6 -54.2 -4 -7.3 29.1 116 92 77.1 70.9 70.9 100
2014 9200 235 -43.9 -104.1 87.1 -51.9 -4 -6.2 25.0 95 69.4 63.5 53.4 53.4 100
2015 8464 216 -40.4 -95.8 80.1 -49.7 -4 -5.3 21.1 77 48.9 51.5 37.6 37.6 75
2016 7787 199 -37.2 -88.1 73.7 -47.7 -4 -4.4 17.6 62 30.6 41.2 23.5 23.5 50
2017 7164 183 -34.2 -81.1 67.8 -45.9 -4 -3.6 14.3 49 14.3 32.4 11.0 11.0 25
RUS Oil Production Profile
2018 6591 168 -31.5 -74.6 62.4 -44.2 -2 -3.2 12.9
2019 6064 155 -28.9 -68.6 57.4 -42.7 -2 -2.5 10.1
2020 5578 143 -26.6 -63.1 52.8 -41.3 -2 -1.9 7.6
2021 5132 131 -24.5 -58.1 48.6 -40.0 -2 -1.3 5.3
2022 4722 121 -22.5 -53.4 44.7 -38.8
2023 4344 111 -20.7 -49.2 41.1 -37.7
2024 3996 102 -19.1 -45.2 37.8 -36.7
-1.2 4.7
-0.7 2.7
-0.2 0.9
2025 3677 94 -17.5 -41.6 34.8 -35.7
5 Year RBL - RUS Oil&Gas Company
20000
100
18000
90
16000
80
14000
70
12000
60
10000
50
Borrowing Base Amount
8000
40
Facility Amount
6000
30
4000
20
2000
10
0
0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
2013
2014
2015
2016
2017 18/06/2013
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Conventional Oil Development : Onshore Russia
Once agreed with the Client (Facility Amount - $100 mm, Available amount - $70.9 mm) an agreement will be found on the margin, commitment fees and upfront fees. Front office team will seek approval in Credit Committees and Risk Management Committees. Requests for additionnal covenants => Negociation with the Client. Request to take a reasonable final take (30%) => Syndication and Insurance. Negociation of roles with other banks. The process takes about 3 months to complete. Bank key roles include : Agent Bank, Coordinating Bank, Technical and modelling Bank, (Local) Account Bank, Security Bank …. Each of this role being key to profitability.
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Conventional Oil Development : Onshore Russia 5 Year RBL - RUS Oil&Gas Company
After 12 months (usually 6), the Banking Case is revised.
100
The company overperformed – production increase and cost in line.
90 80 70
Borrowing Base Amount
The BBA increased from $70.9 to $75 mm.
40
Borrowing Base Amount After 1 year
No need for capital re-imbursement before 2016.
30
Facility Amount
60 50
20
From 2015 onwards, BBA capped by the Facility Amount.
10 0 2013
2014
2015
2016
2017
5 Year RBL - RUS Oil&Gas Company
After 12 months (usually 6), the Banking Case is revised.
100
The company underperformed – production decrease or costs increase.
90 80 70
Borrowing Base Amount
60 50 40
Borrowing Base Amount After 1 year
30
Facility Amount
20
The BBA increased from $70.9 to $35 mm. In 2014, the company must pay back $35.9 mm. Depending on market access, restructuring is likely. Engineers are paid to avoid such a situation
10 0 2013
2014
2015
2016
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Conventional Oil Development : Onshore Russia Oil Price Production Production PDP Production PUD/PROB Revenue Petroleum Taxes Export Custom Duties OPEX CAPEX PDP CAPEX PUD/PROB Corporate Taxe CASH FLOW NPV Field Life CASH FLOW PDP CASH FLOW PROJECT IRR PROJECT
90 76.80 bopd 36.90 bopd 39.90 bopd $mm $mm $mm $mm $mm $mm $mm $mm 164 $mm 86 $mm
$/bbl 2013 10000 10000 0 329 -65.7 -157.0 105.8 -54.2 -4 -85 0.0 -37.4 38.1 -75.5 17%
2014 10000 9200 800 329 -65.7 -157.0 105.8 -54.2 -4 -175 0.0 -127.4 33.2 -160.6
2015 20000 8464 11536 657 -131.5 -313.9 211.6 -88.4 -4 -25 -18.8 75.4 487 28.7 46.7
2016 20000 7787 12213 657 -131.5 -313.9 211.6 -88.4 -4
2017 18156 7164 10992 596 -119.3 -285.0 192.1 -83.0 -4
2018 16483 6591 9893 541 -108.3 -258.7 174.4 -78.1 -2
2019 14967 6064 8903 492 -98.4 -234.9 158.4 -73.7 -2
2020 13591 5578 8013 446 -89.3 -213.3 143.8 -69.7 -2
2021 12344 5132 7212 405 -81.1 -193.7 130.6 -66.0 -2
2022 11212 4722 6490 368 -73.7 -176.0 118.6 -62.7 -2
2023 10185 4344 5841 335 -66.9 -159.9 107.8 -59.7 -2
2024 9254 3996 5257 304 -60.8 -145.2 97.9 -57.0 -2
2025 8408 3677 4732 276 -55.3 -132.0 89.0 -54.6 -2
2026 7935 3677 4258 261 -52.2 -124.5 84.0 -53.2 -2
2027 7509 3677 3833 247 -49.4 -117.9 79.5 -51.9 -2
2028 7126 3677 3449 234 -46.8 -111.8 75.4 -50.8 -2
2029 6781 3677 3104 223 -44.6 -106.4 71.8 -49.8 -2
2030 6471 3677 2794 213 -42.5 -101.6 68.5 -48.9 -2
-23.8 95.4 453 24.5 70.9
-21.0 84.1 394 20.7 63.4
-18.9 75.4
-16.5 66.1
-14.4 57.7
-12.5 50.1
-10.8 43.1
-9.2 36.8
-7.8 31.1
-6.5 25.9
-5.8 23.0
-5.1 20.4
-4.5 18.1
-4.0 16.0
-3.5 14.1
18.8 56.6
15.6 50.6
12.6 45.1
9.9 40.2
8.9 34.2
6.6 30.2
4.5 26.6
25.9
23.0
20.4
18.1
16.0
14.1
Company RUS Oil wants to re-develop its field: $285 mm of CAPEX to be spent over the next 3 years. 39.9 mmbbl of reserves => about $7/bbl. CF analysis shows that the compay will be short of $165 mm of cash. About $70 mm will be raised via Senior Debt. $95 mm to be raised. A Private Equity Funds, propose to provide the $95 mm. Value of RUS Oil will reach $487 mm 1Q 2015. To reach its target IRR of 30%, PE will seek to earn $160 mm early 2015 => Minimum acceptable ownership = 33%. Such a deal valorise RUS Oil at $190 mm (pre-money). Deal makes sense to existing shareholders, as it allows to implement a project increasing their value from $164 to $325 mm.
RUS Oil Production Profile 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
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Technical Due Diligence
Enjoy Reserves Reports ….
… And beautiful field trips.
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About reserves report … What do you think ?
1P = 28 mmbbl 2P = 178 mmbbl
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About reserves report … What do you think ?
Net Gas Reserves (Tcf)
1P
2P
3P
1.16
1.20
1.20
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About reserves report … What do you think ?
• Azurite – operated by Murphy deep offshore Congo • PA Resources (35% and partner) secured a $125 mm bridge financing from Standard Bank. • Take out : 5 year RBL of $158 mm. Approved Reserves : 50 mmbbl.
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… Due diligence !! PA Resources: Only one well with significative history. Proved Reserves, from a clear exponential decline demonstrate EUR = 4.2 mmbbl for the well 2AST1. In the Banking Case proposed by CA-CIB / SB : EUR = 9.5 mmbbl
=> Deal rejected.
Oil Rate
Oil Rate (est.)
WCT
20000
100
18000
90
16000
80
14000
70
12000
60
10000
50
8000
40
6000
30
4000
20
2000
10
0 0
1000000
2000000
3000000
4000000
0 5000000
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What to do when nothing works …. The Baobab field, offshore Ivory Coast. Brutal change of well productivity observed after shutting down a well or the FPSO. Sand control is the issue. ESS not working adequately.
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Decline Curve ?
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… Be inovative
Baobab Production Forecast 30000 PDC Mid Case All wells are shut-in one after the other P11 in 2010 – P6 in 2011 Other wells after 2016
25000
PDC High Case No wells are shut-in
15000 10000 PDC Downside Case All wells are shut-in (one per year)
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
PDC Low Case Only ESS wells are shut-in One after the other
2015
2014
2013
LOAN PERIOD
2012
2010
2009
2008
2007
2006
0
2011
5000
2005
(BOPD)
20000
P DC Do wnside Case
P DC Lo w Case
P DC M id Case
P DC High Case
A ctual pro ductio n
B anking case M id 2010
B anking Case End 2010
Do wnside case End 2010
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SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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Should you follow Equity Research Analysts ? Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Broker 0 1 0 1 0 0 0 1 0 1 0 0 1 0 0 0 1 1 0 0 0 1 8
Ticker
Share Price End 2012 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 22
Analyst's View NEUTRAL BUY SELL BUY ACCUM. REDUCE ACCUM. BUY NEUTRAL BUY BUY NEUTRAL BUY BUY ACCUM. ACCUM. BUY BUY NEUTRAL ACCUM. SELL BUY
Target Price 1.0 2.6 0.4 5.6 1.1 0.8 1.2 1.5 1.0 1.5 1.7 1.0 3.1 2.1 1.2 1.2 3.4 2.6 1.0 1.2 0.8 1.4 37.4
Price end of May 2013 1.00 0.19 0.70 0.86 0.70 0.68 1.10 0.99 0.86 0.86 0.83 0.95 0.77 0.90 0.54 0.87 0.47 0.76 0.94 1.05 1.20 1.03 18.2
Right/Wrong 1 0 1 0 0 1 1 0 1 0 0 1 0 0 0 0 0 0 1 1 1 1 10
75% of the time, this equity analyst gave the right recommendation when not conflicted. He is recognised as a good one by the market. However 100% of the time, Analyst recommends to buy a stock that he brokered. With $8 invested in those stocks you expect a ROI of 2.7X. Instead, you lost $2.
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SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + Canada => decrease of oil imports / pressure on the WTI. GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
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Low US Gas price environnement
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Low US Gas price environnement … to Stay
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Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + Canada => decrease of oil imports / pressure on the WTI. GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
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Low Ethane and Propane prices
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Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + other plays => decrease of oil imports / pressure on oil prices GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
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US Oil Production - Unconventional Daily Oil Production - Bakken Daily Oil Production - Bakken 612126
More than 90% of the wells profitable at 80 USD/bbl in the Bakken
360821 240395
Depending on oil price, more oil plays to become profitable.
131882 69303
2008
2009
2010
US to produce more than 10 millions bopd by 2020
2011
2012
Daily Oil Production - Eagle Ford (TX) Daily Oil Production 262925
113165
358
844
11986
2008
2009
2010
2011
2012
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US Oil imports
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Non – Opec Supply Changes - 2013
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Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + other plays => decrease of oil imports / pressure on oil prices GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
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Europe/UK – A Region of high gas prices
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2013 onwards … A New World for Private Equity
Do you want to invest here ?
Investor protection Onshore developments Production close to consumptions Derisked plays Profitability proven in core areas Competent teams Plenty of Lenders
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2013 onwards … A New World for Private Equity … Or here ? No commerciality proven for resource plays in Europe. A lot of ‘Frontier explorers ‘ claiming they have seen the next Jubilee … up to you to pay and prove it. The precedent of Kosmos in Ghana. Arab Spring : an Arab winter for investors. Regionalisation of the Financing World => tough (or no) market outside North America.
1Q 2013 – 75% of E&C Capital investment opportunities were American. They were less than 50% two years ago.
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THANK YOU!
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Non –Opec Supply Changes - 2012
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Stock Exchange Regulations TSX : National Instrument 51-101 refers to the Canadian Oil and Gas Handbook (COGEH) – The only exhaustive document existing. • Any oil & gas producer below 100’000 boepd shall disclose every year an independent reserves report covering at least 75% of the Proved reserves. • Qualified evaluators/auditors to be registered engineers, member of the SPE or SPEE, and have at least 5/10 years of experience in petroleum engineering or geology. • Reserves may be evaluated by two methods : Constant prices and Forward prices. • Reserves, Contingent and Prospective Resources may be disclosed. SEC : Article 210.4-10(a) of Regulations S-X (17 CFR 210), an update of rule 3-18 adopted in 1978 ! • Prices : Average over the last year to be considered (instead of oil price at 31st December). • Reserves may be associated to unconventional resources (oil sands, SAGD, Shale oil and gas, CBM) • New techniques (3D, MDT, Numerical simulation, Advances in Well tests). Concept or Reliable Technology defined as a ‘technology that has been field tested and has demonstrated consistency and repeatability in the formation being evaluated or in an analogous formation’. • Proved Reserves should be disclosed but it is also allowed to disclose Probable and Possible Reserves. However it is still not permitted to disclose Resources. LSE or AIM : Strictly follows SPE-PRMS.
There has been an overall convergence of rules regulating the disclosure of Reserves.
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SPE Meeting – Geneva – 18.06.2013 Investing and Financing Independent Oil&Gas Companies – Welcome to a changing world !
Philippe W Michel 18 June, 2013
SPE Meeting Geneva
SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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E&P Cycle
Upstream Oil & Gas Financing
Seismic studies Target identification
Exploration wells drilling
Financing sources
Business Angels
Junior Debt
Appraisal wells drilling / delineation
Field life extension EOR Redevelopment Decommissioning
Field development
Private Equity Mezzanine Financing Development Financing
Senior Debt
Reserve Based Lending Pre-Export Financing
ECM
DCM Time
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Upstream Oil & Gas Financing
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SPE Meeting Geneva
SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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Private Equity – E&C Capital
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Private Equity – E&C Capital
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Private Equity – E&C Capital
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Private Equity – Methodology 200 opportunities per year coming from (i) Brokers, (ii) Bank officers, (iii) Team Network First Screening done. 70% of the time, deal is rejected at this stage – do not fit our requirements. First Introduction - Teaser
If screening ok, then NDA or CA is signed => Analysis of confidential information. Technical due diligence peformed. If ok, then meeting of the management team.
NDA /CA
Due Diligence
If due diligence ok, discussion on pre-money valuation.
Deal If pre-money valuation ok, then deal.
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Private Equity – Business Cycle
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Private Equity – Expected Return
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SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
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Upstream Oil & Gas Financing Project Finance Fixed Income Securitization
Facility Amount :$ 300 mm Committed Amount :$ 100 mm
Reserves Based Lending Acquisition Finance Development Finance Pre-export Financing Trade Finance Construction Risk
Construction Risk Undrawn Amount Commitment fees : 40% of the margin
Reservoir Risk
Drawn Amount Margin : LIBOR + 250 -700 bps
Political Risk
Upfront fees : 25 to 250 bps
Reservoir Risk
Performance Risk
Price Risk Short Term up to 3 Years
Mid term up to 7 Years
Long Term up to 20 years
Increased Margin 18/06/2013
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SPE Meeting Geneva
Upstream Oil & Gas Financing
• Screening phase : Requirement to identify deal breakers and key technical risks to be assessed during the due diligence. • Due diligence including Third party work and assessment of company’s opinion. • Sites visit to allow reality check and assessment of operating capabilities of the company. • Conservative assumptions to be retained. • Sensitivities analysis to be conducted. Always consider Risks vs. Rewards !
18/06/2013
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SPE Meeting Geneva
Upstream Oil & Gas Financing
Production Profiles • Based always on Proved Reserves. Only reserves ‘On Production’ or ‘Approved for Development’ are considered. • Check Source and Uses. • Management’s capability to deliver will drive our willingness to consider some PUD. Oil/Gas Prices • Apply ‘Price Deck’. Long Term Brent price of circa. $70 /bbl. (about 70% of Forward prices) OPEX&CAPEX • Usually from Client with a QC based on historical costs. Sensitivity to be run systematically, but in general second order issue.
Key Risk remains underground !
Taxes • Use taxes as currently defined • Market Intelligence to foresee future changes (… quite challenging). Run sensitivities in case of doubts. Technical Covenants • Usually LLCR the constraining factor (1.3 – 1.4 in general). • Reserves Tail at maturity : 25%. Gives headroom in case of restructuring.
18/06/2013
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SPE Meeting Geneva
Conventional Oil Development : Onshore Russia RUS Oil&AS(Russia / Timan Pechora) – 10’000 bopd • 36 oil producers / 9 water injectors from 8 pads • Sandstones – good reservoir rocks – 3 reservoirs • Light Oil (37 deg API) • Artificial lift via ESP • Recovery Factor expected > 40% • Ultimate reserves > 110 millions barrels • CAPEX low < $2/bbl • A well cost is the range of $2 to $3 millions • Field OPEX low < $4/bbl • Export via Transneft Climate - Export
18/06/2013
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16
SPE Meeting Geneva
Conventional Oil Development : Onshore Russia RUS OIL&GAS COMP Oil Price
70
Production Revenue Petroleum Taxes Export Custom Duties
bopd $mm $mm $mm
OPEX CAPEX Corporate Taxe CASH FLOW NPV Field Life NPV Loan Life FLCR LLCR Borrowing Base Amount Facility Amount
$mm $mm $mm $mm $mm 1.5 1.3
$/bbl 2013 10000 256 -47.7 -113.2 94.6 -54.2 -4 -7.3 29.1 116 92 77.1 70.9 70.9 100
2014 9200 235 -43.9 -104.1 87.1 -51.9 -4 -6.2 25.0 95 69.4 63.5 53.4 53.4 100
2015 8464 216 -40.4 -95.8 80.1 -49.7 -4 -5.3 21.1 77 48.9 51.5 37.6 37.6 75
2016 7787 199 -37.2 -88.1 73.7 -47.7 -4 -4.4 17.6 62 30.6 41.2 23.5 23.5 50
2017 7164 183 -34.2 -81.1 67.8 -45.9 -4 -3.6 14.3 49 14.3 32.4 11.0 11.0 25
RUS Oil Production Profile
2018 6591 168 -31.5 -74.6 62.4 -44.2 -2 -3.2 12.9
2019 6064 155 -28.9 -68.6 57.4 -42.7 -2 -2.5 10.1
2020 5578 143 -26.6 -63.1 52.8 -41.3 -2 -1.9 7.6
2021 5132 131 -24.5 -58.1 48.6 -40.0 -2 -1.3 5.3
2022 4722 121 -22.5 -53.4 44.7 -38.8
2023 4344 111 -20.7 -49.2 41.1 -37.7
2024 3996 102 -19.1 -45.2 37.8 -36.7
-1.2 4.7
-0.7 2.7
-0.2 0.9
2025 3677 94 -17.5 -41.6 34.8 -35.7
5 Year RBL - RUS Oil&Gas Company
20000
100
18000
90
16000
80
14000
70
12000
60
10000
50
Borrowing Base Amount
8000
40
Facility Amount
6000
30
4000
20
2000
10
0
0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
2013
2014
2015
2016
2017 18/06/2013
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17
SPE Meeting Geneva
Conventional Oil Development : Onshore Russia
Once agreed with the Client (Facility Amount - $100 mm, Available amount - $70.9 mm) an agreement will be found on the margin, commitment fees and upfront fees. Front office team will seek approval in Credit Committees and Risk Management Committees. Requests for additionnal covenants => Negociation with the Client. Request to take a reasonable final take (30%) => Syndication and Insurance. Negociation of roles with other banks. The process takes about 3 months to complete. Bank key roles include : Agent Bank, Coordinating Bank, Technical and modelling Bank, (Local) Account Bank, Security Bank …. Each of this role being key to profitability.
18/06/2013
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SPE Meeting Geneva
Conventional Oil Development : Onshore Russia 5 Year RBL - RUS Oil&Gas Company
After 12 months (usually 6), the Banking Case is revised.
100
The company overperformed – production increase and cost in line.
90 80 70
Borrowing Base Amount
The BBA increased from $70.9 to $75 mm.
40
Borrowing Base Amount After 1 year
No need for capital re-imbursement before 2016.
30
Facility Amount
60 50
20
From 2015 onwards, BBA capped by the Facility Amount.
10 0 2013
2014
2015
2016
2017
5 Year RBL - RUS Oil&Gas Company
After 12 months (usually 6), the Banking Case is revised.
100
The company underperformed – production decrease or costs increase.
90 80 70
Borrowing Base Amount
60 50 40
Borrowing Base Amount After 1 year
30
Facility Amount
20
The BBA increased from $70.9 to $35 mm. In 2014, the company must pay back $35.9 mm. Depending on market access, restructuring is likely. Engineers are paid to avoid such a situation
10 0 2013
2014
2015
2016
2017 18/06/2013
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SPE Meeting Geneva
Conventional Oil Development : Onshore Russia Oil Price Production Production PDP Production PUD/PROB Revenue Petroleum Taxes Export Custom Duties OPEX CAPEX PDP CAPEX PUD/PROB Corporate Taxe CASH FLOW NPV Field Life CASH FLOW PDP CASH FLOW PROJECT IRR PROJECT
90 76.80 bopd 36.90 bopd 39.90 bopd $mm $mm $mm $mm $mm $mm $mm $mm 164 $mm 86 $mm
$/bbl 2013 10000 10000 0 329 -65.7 -157.0 105.8 -54.2 -4 -85 0.0 -37.4 38.1 -75.5 17%
2014 10000 9200 800 329 -65.7 -157.0 105.8 -54.2 -4 -175 0.0 -127.4 33.2 -160.6
2015 20000 8464 11536 657 -131.5 -313.9 211.6 -88.4 -4 -25 -18.8 75.4 487 28.7 46.7
2016 20000 7787 12213 657 -131.5 -313.9 211.6 -88.4 -4
2017 18156 7164 10992 596 -119.3 -285.0 192.1 -83.0 -4
2018 16483 6591 9893 541 -108.3 -258.7 174.4 -78.1 -2
2019 14967 6064 8903 492 -98.4 -234.9 158.4 -73.7 -2
2020 13591 5578 8013 446 -89.3 -213.3 143.8 -69.7 -2
2021 12344 5132 7212 405 -81.1 -193.7 130.6 -66.0 -2
2022 11212 4722 6490 368 -73.7 -176.0 118.6 -62.7 -2
2023 10185 4344 5841 335 -66.9 -159.9 107.8 -59.7 -2
2024 9254 3996 5257 304 -60.8 -145.2 97.9 -57.0 -2
2025 8408 3677 4732 276 -55.3 -132.0 89.0 -54.6 -2
2026 7935 3677 4258 261 -52.2 -124.5 84.0 -53.2 -2
2027 7509 3677 3833 247 -49.4 -117.9 79.5 -51.9 -2
2028 7126 3677 3449 234 -46.8 -111.8 75.4 -50.8 -2
2029 6781 3677 3104 223 -44.6 -106.4 71.8 -49.8 -2
2030 6471 3677 2794 213 -42.5 -101.6 68.5 -48.9 -2
-23.8 95.4 453 24.5 70.9
-21.0 84.1 394 20.7 63.4
-18.9 75.4
-16.5 66.1
-14.4 57.7
-12.5 50.1
-10.8 43.1
-9.2 36.8
-7.8 31.1
-6.5 25.9
-5.8 23.0
-5.1 20.4
-4.5 18.1
-4.0 16.0
-3.5 14.1
18.8 56.6
15.6 50.6
12.6 45.1
9.9 40.2
8.9 34.2
6.6 30.2
4.5 26.6
25.9
23.0
20.4
18.1
16.0
14.1
Company RUS Oil wants to re-develop its field: $285 mm of CAPEX to be spent over the next 3 years. 39.9 mmbbl of reserves => about $7/bbl. CF analysis shows that the compay will be short of $165 mm of cash. About $70 mm will be raised via Senior Debt. $95 mm to be raised. A Private Equity Funds, propose to provide the $95 mm. Value of RUS Oil will reach $487 mm 1Q 2015. To reach its target IRR of 30%, PE will seek to earn $160 mm early 2015 => Minimum acceptable ownership = 33%. Such a deal valorise RUS Oil at $190 mm (pre-money). Deal makes sense to existing shareholders, as it allows to implement a project increasing their value from $164 to $325 mm.
RUS Oil Production Profile 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
18/06/2013
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SPE Meeting Geneva
Technical Due Diligence
Enjoy Reserves Reports ….
… And beautiful field trips.
18/06/2013
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21
SPE Meeting Geneva
About reserves report … What do you think ?
1P = 28 mmbbl 2P = 178 mmbbl
18/06/2013
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22
SPE Meeting Geneva
About reserves report … What do you think ?
Net Gas Reserves (Tcf)
1P
2P
3P
1.16
1.20
1.20
18/06/2013
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23
SPE Meeting Geneva
About reserves report … What do you think ?
• Azurite – operated by Murphy deep offshore Congo • PA Resources (35% and partner) secured a $125 mm bridge financing from Standard Bank. • Take out : 5 year RBL of $158 mm. Approved Reserves : 50 mmbbl.
18/06/2013
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SPE Meeting Geneva
… Due diligence !! PA Resources: Only one well with significative history. Proved Reserves, from a clear exponential decline demonstrate EUR = 4.2 mmbbl for the well 2AST1. In the Banking Case proposed by CA-CIB / SB : EUR = 9.5 mmbbl
=> Deal rejected.
Oil Rate
Oil Rate (est.)
WCT
20000
100
18000
90
16000
80
14000
70
12000
60
10000
50
8000
40
6000
30
4000
20
2000
10
0 0
1000000
2000000
3000000
4000000
0 5000000
18/06/2013
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25
SPE Meeting Geneva
What to do when nothing works …. The Baobab field, offshore Ivory Coast. Brutal change of well productivity observed after shutting down a well or the FPSO. Sand control is the issue. ESS not working adequately.
18/06/2013 |
26
SPE Meeting Geneva
Decline Curve ?
18/06/2013
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SPE Meeting Geneva
… Be inovative
Baobab Production Forecast 30000 PDC Mid Case All wells are shut-in one after the other P11 in 2010 – P6 in 2011 Other wells after 2016
25000
PDC High Case No wells are shut-in
15000 10000 PDC Downside Case All wells are shut-in (one per year)
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
PDC Low Case Only ESS wells are shut-in One after the other
2015
2014
2013
LOAN PERIOD
2012
2010
2009
2008
2007
2006
0
2011
5000
2005
(BOPD)
20000
P DC Do wnside Case
P DC Lo w Case
P DC M id Case
P DC High Case
A ctual pro ductio n
B anking case M id 2010
B anking Case End 2010
Do wnside case End 2010
18/06/2013
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SPE Meeting Geneva
SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
18/06/2013
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SPE Meeting Geneva
Should you follow Equity Research Analysts ? Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Broker 0 1 0 1 0 0 0 1 0 1 0 0 1 0 0 0 1 1 0 0 0 1 8
Ticker
Share Price End 2012 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 22
Analyst's View NEUTRAL BUY SELL BUY ACCUM. REDUCE ACCUM. BUY NEUTRAL BUY BUY NEUTRAL BUY BUY ACCUM. ACCUM. BUY BUY NEUTRAL ACCUM. SELL BUY
Target Price 1.0 2.6 0.4 5.6 1.1 0.8 1.2 1.5 1.0 1.5 1.7 1.0 3.1 2.1 1.2 1.2 3.4 2.6 1.0 1.2 0.8 1.4 37.4
Price end of May 2013 1.00 0.19 0.70 0.86 0.70 0.68 1.10 0.99 0.86 0.86 0.83 0.95 0.77 0.90 0.54 0.87 0.47 0.76 0.94 1.05 1.20 1.03 18.2
Right/Wrong 1 0 1 0 0 1 1 0 1 0 0 1 0 0 0 0 0 0 1 1 1 1 10
75% of the time, this equity analyst gave the right recommendation when not conflicted. He is recognised as a good one by the market. However 100% of the time, Analyst recommends to buy a stock that he brokered. With $8 invested in those stocks you expect a ROI of 2.7X. Instead, you lost $2.
18/06/20113 |
30
SPE Meeting Geneva
SPE Meeting – Plan 1. Upstream Oil &Gas Financing
2. Investing in Oil & Gas Independents
3. Financing Oil &Gas Independents
4. Should we follow Equity Research analysts ?
5. Over the last 5 years, from the 2 Crisis – a new World
18/06/2013
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31
SPE Meeting Geneva
Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + Canada => decrease of oil imports / pressure on the WTI. GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
18/06/2013
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32
SPE Meeting Geneva
Low US Gas price environnement
18/06/2013
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33
SPE Meeting Geneva
Low US Gas price environnement … to Stay
18/06/2013
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34
SPE Meeting Geneva
Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + Canada => decrease of oil imports / pressure on the WTI. GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
18/06/2013
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35
SPE Meeting Geneva
Low Ethane and Propane prices
18/06/2013
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36
SPE Meeting Geneva
Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + other plays => decrease of oil imports / pressure on oil prices GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
18/06/2013
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37
SPE Meeting Geneva
US Oil Production - Unconventional Daily Oil Production - Bakken Daily Oil Production - Bakken 612126
More than 90% of the wells profitable at 80 USD/bbl in the Bakken
360821 240395
Depending on oil price, more oil plays to become profitable.
131882 69303
2008
2009
2010
US to produce more than 10 millions bopd by 2020
2011
2012
Daily Oil Production - Eagle Ford (TX) Daily Oil Production 262925
113165
358
844
11986
2008
2009
2010
2011
2012
18/06/2013
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38
SPE Meeting Geneva
US Oil imports
18/06/2013
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39
SPE Meeting Geneva
Non – Opec Supply Changes - 2013
18/06/2013
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40
SPE Meeting Geneva
Since 2008 – A New World First in America Subprime crisis + Shale gas boom => Decorrelation between Oil & Gas prices in the USA. Cheap technology + ‘Drill or drop’ leases => Low Gas prices stabilized at $4 mcf (about the LTMC). Profitability of gas producers dropped => rigs and operators moves from dry gas resource plays to rich gas windows. Ethane & LPG prices became depressed => (i) rigs and operators moved to oil resources and (ii) Petrochemical and manaufacturing industries being revived. Oil production increases in Bakken + other plays => decrease of oil imports / pressure on oil prices GDP growth, creation of private jobs. … with implication to the rest of the world. Subprime crisis => Contamination to the world through CDS with bankrupcies of major banks (Lehman Brothers in 2008), other banks were saved costing billions to their respective governement and shareholders (Islandic banks, Fortis, RBS, UBS). Rapid increase of sovereign debts in Europe, damaging their credit quality => Rating downgraded of major European banks => increase cost of borrowing $. In parallel, request of implementing Basel III for European Banks => increase cost of borrowing => bank debt more expensive. Fed ‘encouraged’ Monatery funds to lend in US (2011) => Dollar shortfall for European banks. European banks reduced or exited commodity finance (BNPP sold to Wells Fargo its US RBL business in 2011).
18/06/2013
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41
SPE Meeting Geneva
Europe/UK – A Region of high gas prices
18/06/2013
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42
SPE Meeting Geneva
2013 onwards … A New World for Private Equity
Do you want to invest here ?
Investor protection Onshore developments Production close to consumptions Derisked plays Profitability proven in core areas Competent teams Plenty of Lenders
18/06/2013
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43
SPE Meeting Geneva
2013 onwards … A New World for Private Equity … Or here ? No commerciality proven for resource plays in Europe. A lot of ‘Frontier explorers ‘ claiming they have seen the next Jubilee … up to you to pay and prove it. The precedent of Kosmos in Ghana. Arab Spring : an Arab winter for investors. Regionalisation of the Financing World => tough (or no) market outside North America.
1Q 2013 – 75% of E&C Capital investment opportunities were American. They were less than 50% two years ago.
18/06/2013
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44
SPE Meeting Geneva
THANK YOU!
18/06/2013
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45
SPE Meeting Geneva
Non –Opec Supply Changes - 2012
07/07/2011
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46
SPE Meeting Geneva
Stock Exchange Regulations TSX : National Instrument 51-101 refers to the Canadian Oil and Gas Handbook (COGEH) – The only exhaustive document existing. • Any oil & gas producer below 100’000 boepd shall disclose every year an independent reserves report covering at least 75% of the Proved reserves. • Qualified evaluators/auditors to be registered engineers, member of the SPE or SPEE, and have at least 5/10 years of experience in petroleum engineering or geology. • Reserves may be evaluated by two methods : Constant prices and Forward prices. • Reserves, Contingent and Prospective Resources may be disclosed. SEC : Article 210.4-10(a) of Regulations S-X (17 CFR 210), an update of rule 3-18 adopted in 1978 ! • Prices : Average over the last year to be considered (instead of oil price at 31st December). • Reserves may be associated to unconventional resources (oil sands, SAGD, Shale oil and gas, CBM) • New techniques (3D, MDT, Numerical simulation, Advances in Well tests). Concept or Reliable Technology defined as a ‘technology that has been field tested and has demonstrated consistency and repeatability in the formation being evaluated or in an analogous formation’. • Proved Reserves should be disclosed but it is also allowed to disclose Probable and Possible Reserves. However it is still not permitted to disclose Resources. LSE or AIM : Strictly follows SPE-PRMS.
There has been an overall convergence of rules regulating the disclosure of Reserves.
07/07/2011
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47
