December 15, 2022 - On December 13th, the LSTA hosted the Semi-annual Oil & Gas Update presented by the Haynes and Boone team which included, Jeff Nichols, Kim Mai, Jeremy Kennedy, and Kraig Grahmann. The team shared their insights on a number of key topics including a market update on O&G asset backed securitizations, a review of recent trends in private O&G transaction structures, and the highlights of the Haynes Boone fall borrowing base redetermination survey.
The team identified three common structures used in private O&G transactions. The first and most common structure discussed was asset purchase agreements. Generally, this type covers the sale of all assets of a group of assets of the seller and thus the assets description is critical. Some deals include target areas in their deals, and for these it is important to define the area – the “box” – because there is a need not only for a clear description to satisfy statutory requirements but if there is an asset that sits partially within the target area, the parties need to have a meeting of the minds with respect to that asset to avoid disputes later.
Membership (or partnership) interests purchase agreements (MIPAs and PIPAs) involve the sale of all the units in an LLC (or partnership interests in an LP). Generally, these transactions, which are growing in popularity, are structured to mimic several aspects of an asset purchase agreement. The economic upside and downside are shared as of the effective time and the asset description remains important for title and environmental defects, representations, covenants, and purchase price adjustments. A MIPA more completely shifts all liabilities to the buyer at closing with retained liabilities being less common. Recent trends in this area include sellers having more success in shedding post-closing liabilities. In addition, they noted that they are seeing a greater number of transactions with no post-closing representation and warranty survival, and R&W insurance usage has not increased as much as they had expected.
Haynes and Boone has conducted 16 borrowing base redetermination surveys since 2015. The primary objective of the survey is to provide a forward-looking and clear idea of what lenders, borrowers (oil and gas producers) and others are experiencing regarding borrowing base redeterminations in light of the price uncertainty in the commodity markets. The key takeaways of the fall survey are interesting and perhaps surprising to those who do not practice in this industry. Strong oil and gas prices are not directly resulting in strong borrowing base increases. Despite oil and natural gas prices reaching heights not seen since 2014 (in the case of oil) and 2008 (in the case of natural gas), respondents are not expecting robust borrowing base increases in the fall. A meaningful percentage of respondents are predicting that borrowing bases will stay flat or even decrease slightly. The survey shows lower hedging percentages, a trend that started in the spring 2022 survey. Producers appear to be assuming that there is more price upside to come and thus do not want to risk leaving money on the table.
The capital sources that show the biggest increase in this fall survey when compared to the spring 2022 survey are monetization transactions and debt from alternative capital providers, a trend that is not normally seen during the stronger price environment that currently exists. This perhaps is the result of the more muted interest from banks, debt capital markets and equity capital markets.
Producers looking to raise capital in the RBL market will have to factor in low leverage levels . Respondents see leverage below 2.0x (and ideally below 1.5x) as a necessity to successfully attract RBL capital.
Click here for the replay and the slides.