mezzanine finance for independents: how to keep your ... · 8/22/2013  · mezzanine 20% - 30%...

Mezzanine Finance for Independents:

How to Keep Your Project Moving

SIPES

Houston, TX

August 22, 2013

About Five States

Why Review Financing?

What is Mezzanine?

Cost of Capital

Case Studies

Overview

ABOUT FIVE STATES

Five States Energy Capital, LLC

1985

•Five States Energy Company, Inc.

•Acquires operated and non-operated working interests

1985

• Five States Operating Company, Inc.

• Operates Five States’ interest properties

2004

• Total Energy Asset Management Services (TEAMS)

• Oversight of portfolio asset properties

2007

• Five States Energy Capital, LLC

• Provides mezzanine capital to independents

Independents % Allocation of Time

Why Review Financing?

Activity % of Time

Research & Culling Data 35 - 65

Project Development 10 - 20

Project Financing 20 - 50

Administration 10 - 20

Independents’ Sources of Development Capital

Why Review Financing?

• Available Cash

• Cash Flow from Previous Activities

• Sell Down of Promoted Interest

• Cash Flow from Current Project

• Convert Working Interest to Override

• Bank Loans

• Convenient Sources

• Mezzanine Financing!

WHAT IS MEZZANINE?

Fills Gap Between Senior

Debt and Equity

Subordinate in Priority of

Payment to Senior Debt

Senior in Rank to Equity

Stretch Debt

As With Banks, Advances

Usually Based on Proved

Reserve Base

What is Mezzanine?

MEZZANINE

Senior Asset Backed Debt

Equity

Development drilling programs

Acquisition financing

Infrastructure financing

Bank clients that are over extended (but

typically still solvent)

Mezzanine typically fits:

Capital Structure in Oil & Natural Gas Transaction

• Advantages – Not a sale of equity

– No loss of control of

company

– No requirement to sell on a

schedule

– Puts up majority of

development capital with

minority stake in project

– Appears as debt; can be

financed from pre-tax

revenue

– No board position required

Companies with Efficient Capital Structures

5% - 12% Senior Debt 50% - 75 %

Mezzanine 20% - 30%

Equity 15% - 30%

13% - 25%

25% +

Typical Private Equity Structure . (% of total Assets)

Expected

Returns (%)

Source: Management Magazine, Bond Capital

COST OF CAPITAL

Relative Costs of Financing Options

Banks

Mezzanine

Private Equity

Lowering Cost of Capital

Case 1: Traditional Case 2: Typical Debt Case 3: High Leverage

100%

50%

20%

20%

50% 60% Equity

Mezzanine Bank Debt

Company Capital Structure. (% of Company Value)

80% of company

value can be

released in Cash

Return on Equity

Weighted Average Cost of Capital

35 %

19 %

11%

12 % 21% 40% Source: Management Magazine, Bond Capital

Underwriting Process

1 • Initial Investment Criteria Check

2 • Engineering Analysis

3 • Financial Analysis

4 • Operations / Legal / Land Analysis

5 • Term Sheet Issued

6 • Final Due Diligence

7 • Close Investment

Oil, gas, and midstream deals are

sourced in the marketplace through

industry contacts and intermediaries

~50% pass initial screening for further

evaluation

~5-10% pass due diligence

and term sheets are issued

~2-5% are

closed and

become part

of the portfolio

Typical Term Sheet

Interest • ~12% coupon

• ~25% WI Back-in at Payout

Term 3-5 years

Facility Determined

By:

• 90-100% PDP

• Discounted PDNP and PUDs

• Land/Leases

Structure Very fluid

What Do Lenders Look For In A:

Borrower?

Deal Structure

Business Plan

Track Record

Equity Participation

Collateral (PDP, PUDs, Leases)

Reputation/Character

Collateral

Higher Risk

• “PUD” Proved Undeveloped

• Leases

Moderate Risk

• “PDNP” Proved Developed Non-Producing

Lower Risk

• “PDP” Proved Developed Producing

~10% ~25% ~90%

CASE STUDIES

Financing Package – Bakken

Appalachian Acquisition Package

Pipeline Construction – West Texas

$85mm Mezzanine Debt Financing for Development of 14,000 Acres in North Dakota • $16.2mm initial advance

with remaining funding to occur over time

• 45 producing wells and need for funding to keep pace with rapid development of the area

• Senior note @ 6.25% – bank revolver structure (30%)

• Junior note @ 12.50% – mezzanine structure w/ BIAPO* (20%)

24

Financing Package - Bakken

Note: Photo for illustration only. *BIAPO: Back In After Pay Out

Appalachian Transaction (WV & OH)

Collateral

PDP and PUDs

Term 5 years

Interest Rate 12%

Origination Fee 1.0%

Equity Component 25% at term or repayment

• Option to purchase 25% of assets for cash

equivalent of loan amount at closing

Hedging 75%

Advantage Pipeline – West Texas

Pipeline Construction

Advantage Pipeline – West Texas

Pipeline Construction

• Location: Pecos, TX to Crane, TX

• Length: 75 miles

• Cost: $60 MM

• Deal Structure: $17.5 MM equity financing

Mezzanine can be a good fit for:

– Companies focused on acquisition and development

– Especially when there is existing production

– Companies needing to pay down bank debt

At end of term:

– Company is left with majority of equity

– Greater profit potential

Summary

Five States Energy Capital, LLC

Mezzanine Finance Market