FINANCING INDEPENDENT OIL & GAS PROJECTS: CRITICAL SUCCESS FACTORS IN THE CURRENT ENVIRONMENT Steve...

FINANCING INDEPENDENT OIL & GAS PROJECTS:FINANCING INDEPENDENT OIL & GAS PROJECTS:CRITICAL SUCCESS FACTORS IN THE CURRENT CRITICAL SUCCESS FACTORS IN THE CURRENT

ENVIRONMENTENVIRONMENT

Steve PuckettSteve PuckettTRI-ZEN InternationalTRI-ZEN International

FINANCING INDEPENDENT OIL & GAS PROJECTSFINANCING INDEPENDENT OIL & GAS PROJECTS

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OUTLOOKOUTLOOK

Project Finance in late 1990’s….Project Finance in late 1990’s….

….e….employing off balance sheet project finance and financial engineering to enhance equity returns, while preserving corporate credit ratings and improving reported earnings

Independent oil & gas projects in 2008….in 2008….

…. …. debt financing to fund the acquisition and development of oil & gas assets, with developments in the types of transactions financed, the choice of debt options and the terms available


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OIL & GAS PROSPECTSOIL & GAS PROSPECTS

In the global oil & gas market much of the activity is being driven by meeting the surging energy demands of the Asian region. Asian companies are investing heavily

The most active regions are the reserve-rich FSU, the Middle East, North Africa & South East Asia

Gas prospects and LNG development also seeing dramatic growth and increasing deal interest, due in part to technology improvements, lower costs in some areas, and surging demand


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STANDARD BORROWING BASESTANDARD BORROWING BASE

Combines flexibility with relatively favourable pricing

Enables borrowers with significant assets to raise debt financing on their value

Producing assets assessed typically on a P50 basis and development assets on a P90 basis

Finance facilities flexible and typically revolving

Cash flow projections critical and sets the amount, pricing and maturity date of debt available


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Equity markets typically tapped at early stage for potentially significant funding

Equity markets can be volatile and sometimes difficult to tap for future finance

Recent liquidity in debt markets has resulted in the availability of short term loans or ‘bridge financing’ to be later replaced by base financing once cash-flows / production levels permit

Lenders typically seek to ensure everything necessary is in place to ensure development stage assets can be brought into production within say 12 months

FINANCING OPTIONS WITHOUT AN ASSET BASEFINANCING OPTIONS WITHOUT AN ASSET BASE


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FINANCING OPTIONS – CRITICAL FACTORS FOR BRIDGE FINANCEFINANCING OPTIONS – CRITICAL FACTORS FOR BRIDGE FINANCE

No barriers to entry in way of production

No barriers to entry in way of transportation

Confidence in regulatory market to allow approvals for delivery

Comprehensive Due Diligence

Early refinancing encouraged by lenders which require a “right to match” or prospect of facing punitive fees


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FINANCING OPTIONS - ALTERNATIVESFINANCING OPTIONS - ALTERNATIVES

Investment banks promoting alternatives to commercial bank debt

Short maturity loans that can be arranged, but not underwritten, by the bank and with a group of non-bank lenders, such as hedge funds, arranged

Can be advanced in single tranche at financial close, but attracting a higher price – in both margin & fees

Risk of tighter security package. Completion risk accepted, where extension or waiver of the debt repayment may be more challenging, but not impossible, because of commonly shared objectives for success


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GROWTH THROUGH ACQUISITION GROWTH THROUGH ACQUISITION

A route to fast track growth and fast track to a borrowing base facility

Many acquisitions are effectively “auctions” where a borrowing base facility – with the addition of stretch tranches maximizes the available funds

The borrowing base value will be secured against the assets acquired, effecting transformational growth for the acquiring company

To avoid pre-emption, other contract and license issues, and often also for tax efficiency, the acquisition will typically be by share purchase


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GROWTH THROUGH ACQUISITION – RISK AND SECURITYGROWTH THROUGH ACQUISITION – RISK AND SECURITY

Security will be sought by lenders but in some jurisdictions, limited financial assistance is allowed

Multi – sourcing and layering of debt, including such options as Mezzanine finance, or use of secondary markets, or a “second lien loan”

Second lien lenders are classified as Senior lenders until an event requiring enforcement of a security, when they will rank lower

Such structures have been prevalent in Europe


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FUTURE PROSPECTS - PUBLIC COMPANY TAKEOVERSFUTURE PROSPECTS - PUBLIC COMPANY TAKEOVERS

Are we reaching a time of consolidation for the many smaller independent companies that have come to market?

With larger number of companies in the UK’s AIM market and other secondary markets, we may be entering a period where listed company takeovers are seen

Such takeovers could be funded by acquisition financing debt – possibly from hedge funds, or similar institutions


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FUTURE PROSPECTS – PUBLIC TO PRIVATEFUTURE PROSPECTS – PUBLIC TO PRIVATE

Public to private – a market trend – able to be similarly funded by acquisition financing debt

Additional challenges and risks are matched by potential significant rewards

Typically an offer will rely on key conditions, such as no material change in business, but in some jurisdictions, such as the UK, these will not be upheld

Offers will likely also contain default events – again challenging to enforce

Other than publicly available info, limited access for DD


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ASSETSASSETS

Growth in international activities of independent oil & gas companies is a further increasing trend

Variety of jurisdictions can circumnavigate the globe ….South America-Middle East-India-Indonesia-China

A borrowing base facility is usefully flexible for a range of jurisdictions and for a range of maturity of businesses and assets

The mature and the newer assets in different territories can blend to balance risk


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FUTURE PROSPECTS – GLOBAL CONSIDERATIONS FUTURE PROSPECTS – GLOBAL CONSIDERATIONS

Global prospects, including countries in the Middle East, can offer opportunities for borrowings, particularly for smaller oil & gas prospects where the NOCs or IOC’s have less interest

A borrowing base facility for new market entries relies on a mix of security. Typically these are less than for project finance arrangements and are by way of such items as share pledges or debentures as charges over assets

Borrowing base facilities do not impose the same extent of rigid requirements for direct agreements with counterparties that are usually required in project finance


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FUTURE PROSPECTS - GROWTHFUTURE PROSPECTS - GROWTH

In this highly priced and sometimes volatile environment the financing of projects reflects the dynamic business environment

Flexible financing has been enabling independent oil and gas businesses to pursue and fully exploit the increasingly global prospects and opportunities

Finance providers and their advisors are quick to adapt to newly evolving landscapes


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FUTURE PROSPECTS – CURRENT MARKET UNCERTAINTIESFUTURE PROSPECTS – CURRENT MARKET UNCERTAINTIES

Current uncertain market conditions will impact lenders’ perspectives

Loan percentages likely to fall and pricing to increase

Relationship banking likely to gain in importance while non-bank lenders may reduce in numbers

Deal closing may take longer and more be pre-syndicated

The value of secondary market loans could impact the appetite for primary market deals and projects’ future cash-flows will need more certainty….for how long?


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THANK YOU THANK YOU

TRI-ZEN International

Singapore and

Bangkok Hong Kong Jakarta Melbourne Mumbai Perth Shanghai

www.tri-zen.com

The author is grateful to Ashurst for input and advice in preparation of this presentation

FINANCING INDEPENDENT OIL & GAS PROJECTS: CRITICAL SUCCESS FACTORS IN THE CURRENT ENVIRONMENT Steve...

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