SFVegas: Oil and gas royalty ABS an expected 2020 trend

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LAS VEGAS - The successful placement of two oil and gas royalty securitizations last fall is just scratching the surface on what could be a large-scale return of energy companies into asset-backed bonds.

“I don't think we're seeing like widespread ‘run for the hills’ on the bank side, but they're pulling back a little bit. That allows [ABS] investors to step in,” said Greg Kabance, a managing director and ratings analyst for Fitch Ratings.

Kabance was moderating an opening-day panel Sunday for the Structured Finance Association’s annual ABS conference in Las Vegas.

In two privately rated deals that priced between September and November 2019, two U.S. firms transferred diversified portfolios of oil and natural gas wells into special-purpose vehicles. The securitizations by Raisa Energy and Diversified Oil & Gas plc involved the transfer of ownership interest in oil and gas wells to affiliated special-purpose entities that issued bonds secured by the wells’ royalties and asset values.

The deals were billed as alternative funding sources for the two sponsors, providing options beyond the traditional reserve-base lending (RBL) lines from banks. The deals are expected to spark more interest from producers and operators this year as an alternative finance option in place of the short-term reserve-based-lending from banks, which accounts for hundreds of billions of dollars in capital to the industry each year.

“We can provide a diversified investor base at s terms that are very similar to the RBL market, if not better, and give predictability and certainty as to what their investors will be and what their amortization profile will look like,” said John Siris, a managing director at Guggenheim Securities, a panelist for the afternoon discussion for the SFA Vegas confab that will continue through Wednesday at the Aria Resort & Casino.

Guggenheim was the lead on both deals.

The new esoteric class for oil and gas financing could be in for substantial growth in the near time, taking the share of an RBL market that while huge – “hundreds of billions of dollars” annually, according to a Guggenheim source – is growing less attractive to lenders and their borrowers.

“Banks have just throwing money at these types of companies,” for years, offering high-yield bonds to finance the warehouse lines, Siris said. But the HY market for these bonds, as well as the bank fees, “have dried up a bit … and (E&P) companies are starting to look to diversify.”

According to Sitis, “this is a more fixed line of financing than a bank line,” which provides more long-term stability than RBL lines (for which the borrowing base is usually reviewed at six-month intervals).

As securitizations, the oil and gas deals can be structured as investment-grade offerings, as with Raisa and Diversified Gas.

Denver-based Raisa Energy closed on the first securitization of oil and gas well production in September in an unspecified private bond placement that garnered an investment-grade rating. Raisa is a portfolio company of EnCap Investments LP, a venture capital firm for independent oil and gas firms.

A U.S.-based operator working in the Appalachian region, Diversified Gas, followed with a $200 million securitization in November in a deal placed through Munich Re Reserve Risk Financing, a subsidiary of energy industry-related global reinsurance firm Munich Re. The notes were assigned a BBB- investment-grade rating by Fitch Ratings and DBRS Morningstar.

Diversified Gas, which used the proceeds to pay down debt in an existing credit facility, is backing the notes from a portion of future revenue flow from its proved-developed-producing asset portfolio.

Fitch Ratings has previously predicted oil and gas companies would begin tapping the securitization market with rated securities that have to be backed by proven developed and producing reserves.

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