Diversified Energy Share Discussion Threads

[mondex] 31/10/2022 09:11

Novel asset-backed bonds lure shale sector away from bank loans (World Oil)

As big banks pull back on lending to oil and gas drillers, some U.S. energy companies are relying on a novel kind of bond to get the financing they need.

The bonds are backed by the companies’ oil and gas reserves, meaning producers are essentially pledging income from their wells in exchange for up-front cash. The debt known as “proved developing producing” securitizations can allow shale drillers to pay less to borrow, in exchange for giving up some of their possible gains if energy prices rise.


Companies this year have sold, or are in the middle of selling, $4 billion of PDP securitizations. That’s up from just $1.4 billion total over the previous three years, according to data from Fitch Ratings. The first such bond was sold in 2019.

Energy companies are broadly cutting back on borrowing now because they are awash in cash. New loans to oil and gas firms fell more than 30% from 2018 to 2021 and are on track to fall again this year, according to data compiled by Bloomberg. Banks have also been under pressure from regulators and investors to cut back on lending to an industry that is notorious for overspending during booms that get followed by busts.

But many energy companies still need financing. Colorado-based Jonah Energy sold a $750 million PDP securitization this month, backed by the rights to proceeds from about 2,400 oil and gas wells -- virtually all the wells it owns. The driller will pay a yield of about 8% for its PDP securitization with an average life of three years.

In contrast, UK-based oil and gas driller EnQuest Plc this month sold unsecured five-year bonds at a yield of 12%.

By selling a PDP securitization, Jonah managed to garner substantial savings, all the more impressive because just a few years ago the company couldn’t pay its obligations. In 2020, during the early stage of the pandemic, the company restructured its balance sheet to cut its debt, raise equity and hand over a majority of the company to some former noteholders.

The securitizations offer other advantages as well, most notably when energy prices drop. A common alternative form of financing, known as reserve-based loans, is also secured by a company’s wells. With these loans, every six months, banks estimate the value of the oil and gas wells backing the loan.

If the assets have declined in value, companies have to cut their borrowings or offer more collateral. And even in good times, when prices are rising, drillers may not see their borrowing bases rise, meaning the corporations may not be entitled to borrow more. According to a survey of borrowers and lenders in the reserve-based loan market from Haynes and Boone, a law firm, strong oil and gas prices haven’t been resulting in borrowing base increases recently.

With PDP securitizations, collateral doesn’t get re-valued.

“This is a more permanent source of capital,” said Greg Kabance, a managing director at Fitch.

Jonah is using the proceeds from its securitized deal to refinance its existing reserve-based loan, according to a statement from Tom Hart, Jonah’s president and CEO. The deal “positions us with a strong balance sheet to pursue the significant drilling opportunities that we have on our acreage and strategic opportunities that may come our way,” he said.

But there are downsides to these deals too. To protect investors in PDP securitizations, companies selling these bonds usually enter derivatives transactions that effectively give them steady income from the assets over the life of the bonds, and reduce their potential gains from energy price increases. The banks that sell these derivatives bear the risk of oil and gas prices falling and reap the benefits of prices rising. The Wall Street firms can hedge their exposure using options and other instruments.

These derivatives are one reason why big, integrated oil and gas firms like Exxon Mobil Corp. have avoided selling PDP securities: they don’t want to give up their potential gains. So far, the space has been dominated mostly by smaller, private firms, some of which have done multiple securitizations. They include Wyoming-focused gas producer PureWest Energy and Denver-based Raisa Energy, which owns and leases oil assets across North America. Diversified Energy, the owner of a vast empire of wells in Appalachia, has completed six.

In addition to pressure from regulators, banks have faced pressure from investors to cut exposure to businesses that are seen as risky from an environmental, social or governance perspective.

“Fewer banks these days are willing to lend into the upstream oil and gas industry, in part of because of ESG and other concerns,” said Michael O’Leary, a partner at law firm Hunton Andrews Kurth, who has written about PDP securitizations.

[renewed1] 31/10/2022 08:42

Too complicated for my understanding....can anyone explain in simple language what they are doing?

[lab305] 31/10/2022 08:30

NATURAL GAS
6.127 +0.443 +7.79%

[asp5] 31/10/2022 07:48

latest ABS deal is interesting. Although weighted average interest rates overall is currently a favourable 5,7% the latest deal came in at 7,5%.

The near ~50% increase in financing costs (compared to past deals) will surely have an impact in the market more broadly. For the big players why load up the balance sheet with debt by executing similar ABS structures when they can make a true sale to the likes of DEC.

From a liquidity perspective I expect the $300M to increase by ~$200M once the conoco deal is factored in. Again leaving DEC well placed to take advanatge of any distressed asset sales in the months head.

[lomand01] 28/10/2022 15:51

Gas prices off in the USA around 3% so assume that's the reason for share weakness today. Good opportunity for some share buy back activity.this is seriously cheap.

[woodhawk] 28/10/2022 12:13

mrnumty,

RE SIPP and withholding tax - HL may not deduct the tax in respect of shares held in a SIPP, but other platforms DO. I use IG Index and they definitely deduct the 15% from my SIPP holding (I have current W8-BEN). I have repeatedly questioned this, but they refuse to budge. iWEB (Halifax) are even more useless.

[aleman] 26/10/2022 12:29

Gas futures and commentary on them suggest the EU has enough gas unless it has a colder than average winter.

[owenski] 26/10/2022 12:13

“ Most major gas users on the Continent now have storage levels at more than 90% capacity “ .

For now.

Winter hasn't started yet.

[1knocker] 26/10/2022 11:46

Unseasonably warm weather, sun shining, and the wind blowing. Nice to be hedged at prices which enable a 10% divi to be paid, isn't it?

[aleman] 25/10/2022 11:37

There are a few more posts from him. He sounds a bit pessimistic to me on Europe. I think demand destruction (efficiencies) and subsitutions of other energy types mean not all Russian supply will need replacing. EU futures seem fairly relaxed about the situation. He mentions NE USA might have shortages coming so that's one to research.

[mrnumpty] 25/10/2022 08:19

Aleman . Your statement is confirmed in an article in today’s Telegraph ( page 19 ) titled “ Gas prices fall to lowest since June in warm autumn “ . The article only refers to Britain / Europe , so nothing relating to DEC’s market in the USA , and it states “ Most major gas users on the Continent now have storage levels at more than 90% capacity “ .

[bluemango] 24/10/2022 21:02

So it's 'only' 10% yield after 15% WHT at today's closing price and exchange rate, what a shame! 🙂

[popit] 24/10/2022 19:57

mrnumpty / bluemango

Thanks for the answers. I just have an ordinary dealing account and so unfortunately it looks like 15% or 30% Withholding Tax if I buy them.

[aleman] 24/10/2022 16:46

EU gas for 1-hour delivery turns NEGATIVE. I take it reserves are basically full now so they can squeeze no more in and warm weather means demand is low.

[mrnumpty] 24/10/2022 10:52

Pipit . With regard to withholding tax , if you fill in the W8 BEN Form , there is no tax if the DEC shares are held in a SIPP but , even with the W8 BEN Form , there is 15% withholding tax if the same DEC shares are held in an ISA . Without filling in W8 BEN , it’s 30% withholding tax . I was able to do this easily with Hargreaves Lansdown in spite of being a technophobe . Hope this clarifies matters .

[asp5] 24/10/2022 07:45

Latest on the sharebuybacks:

7,22% ( 6.139.608,00) of the 85M shares have been bought at a weighted average price of 128,65p over 13 trading days.

I expect Q3 & year end reporting to be a volatile period for shares. The timing of this buyback combined with dollar strength is highly positive for those looking to hold long term.

[fred177] 24/10/2022 07:39

if you hold in an investment account complete a form W8 BEN it reduces to 15%, only works with some brokers IG is ok

[bluemango] 23/10/2022 23:35

Not if it's held in a SIPP.

All explained in the header.

[popit] 23/10/2022 23:31

Does anyone know if these have US Withholding tax of 30% deducted on the dividend?

[mrnumpty] 18/10/2022 19:58

Lord gnome and meanreverter . Thanks for your comments - yes , I should stick to using a proper computer keyboard , as I am doing now , but I was being being lazy by using the keypad on my mobile . No offence taken , as your comments were civil and meant in the spirt of mutual help . I hope that , apart from mirth caused by the ridiculous predictive texting , the substance of my two posts was of use . Anyway , does anyone have any thoughts about today's 3.7p ( 2.87% ) drop ? Although the way the LSE allocates transactions as buys or sells can be very misleading , it seems to me that the three moderately large trades today after hours were all buys , as they were all above the current buy price of £ 1.25.30 ( 53,548 @ £ 1.27.662 ; 24,778 @ 1.27.396 ; 21,767 @ 1.25.40 ) . No doubt a reason for the drop is that Henry Hub has fallen to $ 5.79 , presumably because we are currently in the gap between the need for air conditioning during the recent very hot summer in the USA , whilst the USA isn't yet sufficiently cold for much need for central heating . Perhaps another explanation might be that , whereas DEC's share price has recently held firm , the FTSE 100 and , more so , the FTSE 250 , have staged a slight rally in the last couple of days , so perhaps people have taken profits from DEC in order to catch the rally . I note that , according to the FT today , " Europe [ is ] at risk of ' much worse ' energy crisis next year , warns Qatar " . It was only a couple of months ago that DEC's share price fell from about £ 1.25 to £ 1.10 , before then leaping to £ 1.40 , so maybe it will soon be time to acquire more ?

[holts] 18/10/2022 17:06

House broker doing a good job of pulling price down for buybacks then .

[lord gnome] 18/10/2022 16:37

mrnumpty - you do realise that you can edit your posts, don’t you? You might not be able to do this on an app, but you can certainly do it on proper computer on the web site. This will allow you to correct errors and typos. Sorry if this is teaching you how to suck eggs.

[mrnumpty] 18/10/2022 09:14

Meanreverter . Indeed !