Oil, gas and liquid gas reserve assets in Colorado and Utah will secure $525 million in asset-backed securities to be issued from the Terra ABS I, Series 2022-1 deal.
Terra ABS I's transaction portfolio consists of 6,397 wells—heavily weighted toward natural gas production—that have a full-life PV-10 value of about $1.06 billion, and 15-year, PV-10 value of $993.5 million, according to a pre-sale report from Fitch Ratings.
Natural gas accounts for 82% of the wells' production. When broken down by revenue, natural gas accounts for 80% of the assets' revenue mix; natural gas liquid accounts for 16% and oil revenue represents 4% of revenue, according to Fitch. The wells are located in the Piceance Basin, located on 290,000 gross acres in Colorado and Utah, and have a weighted average (WA) seasoning of about 8.8 years. No individual well accounts for more than 1% of the portfolio, the rating agency said.
"The diversification and seasoning of the wells will support a stable decline curve, which is generally aligned with the IE expectations of approximately 9% per year," analysts wrote.
Based on the IE estimates, the notes are expected to have average debt service coverage ratios (DSCRs) of about 1.63x on the class A-1 notes and 1.39x for the class A-2 notes. In another positive for the portfolio, hedges covering 85% of gas and oil exposure for the deal's first 36 months, and 80% of exposure for the subsequent 24 months mitigate price risks, the rating agency said.
Those hedges stabilize cash flows on the notes through their expected maturity, allowing the class A-1 notes to achieve ratings in the A category, Fitch said, and the notes benefit from a number of hedge counterparties, according to Fitch. They include the Morgan Stanley Capital Group, JPMorgan Chase Bank, Wells Fargo Bank, BP and Energy Partners. Morgan Stanley and BP Corporation North America are hedge guarantors, Fitch said.
Fitch expects to assign a 'A-' rating to the $314.5 million, class A-1 notes, and 'BBB+' to the $210.5 million, class A-2 notes. All of the notes have a legal final maturity of December 2042.
