Energy Lending Industry Review Investor Conference Call. January 20, 2015

Transcription

1 Investor Conference Call January 20, 2015

2 Factors Impacting Borrowing Base Loan Amount Lower prices / price deck Higher prices / price deck Energy Lending Industry Review Borrowing Base Decrease Borrowing Base Increase Unwinding existing hedges with strike prices above price deck Additional hedges at prices above price deck Reserve divesture (with material PDP component) Reserve acquisition (with material PDP component) Producing existing PDP reserves and not replacing them through drilling or acquisitions Converting PUD or unproven reserves into PDP category through drilling of development or exploratory wells Increased operating costs, G&A expenses, production taxes, drilling / completion CAPEX Converting PDP reserves to PDNP category because of weather and/or (hurricane, freezing temperatures) mechanical/operational problems (requiring well maintenance or repair of pipeline/processing facilities) Negative reserve revisions (performance was less than expected) resulting in fewer reserves being recovered Reducing operating costs, G&A expenses, production taxes, drilling / completion CAPEX Converting PDNP reserves to PDP category, recompletion of additional behind pipe zones Positive reserve revisions (performance was better than expected) resulting in more reserves being recovered Risk associated with the volatility of commodity prices/market values for oil and gas properties is mitigated by the flexibility in a reserved based loan with standard borrowing base provisions. Borrowers can manage risk through commodity hedging, maintaining adequate liquidity, taking prudent exploration risks, and not over leveraging the balance sheet. 2

3 $300, $250, $200, Energy Lending Industry Review Reserve Based Loan Engineering Cases Unrisked FNR at Futures Strip Unrisked FNR at Base Pricing (72.5% of Futures Strip) Base Case Pricing Risked Undiscounted FNR Base Case Pricing Risked FNR Discounted PV9% Sensitivity Case Pricing Risked Discounted 9% FNR Borrowing Base $150, $100, Note FNR, Future Net Revenue, is defined as the net revenue after the deduction of lease operating expenses, production taxes and capex associated with converting nonproducing reserves into the proved developed producing category. $50, $

4 Reserve Based Loan Determining Borrowing Base $90, $80, $70, $60, $50, Day 1 Advance Rate of 62.0% with collateral value of $80.6 million. Six Month Roll Forward Advance Rate of 64.6% with collateral value of $77.4 million. Future Date of Projected Loan Payout Base Case Pricing Risked FNR Discounted PV9% Sensitivity Case Pricing Risked Discounted 9% FNR Borrowing Base Future Net Revenue Future Net Revenue of 48% after payout. $40, $30, $20, $10, Reserve Tail $ Initial Borrowing Base = Lower of 65% Day 1 or 6 Month Roll Forward Base Case & 100% of the Sensitivity Case. 4

5 Energy Lending Industry Review Reserve Based Loan Equity Cushion $90, Base Case Pricing Risked FNR Discounted PV9% Sensitivity Case Pricing Risked Discounted 9% FNR $80, Borrowing Base $70, $60, $50, $40, $30, $20, Equity Cushion $10, $ Focus on Advance Rates and Adequate Reserve Tail results in equity cushion and acceptable collateral over 5 the life of the loan.

6 Glossary of Oil & Gas Reserve Lending Terms All definitions are sourced directly from the Society of Petroleum Engineers Glossary of Terms Used in Petroleum Reserves/Resources Definitions and from the Office of the Comptroller of the Currency s April 2014 report on Oil and Gas Production Lending. Links to these and additional definitions are found at the end of this document. BORROWING BASE - A collateral base agreed to by the borrower and lender that is used to limit the amount of funds the lender advances the borrower. The borrowing base specifies the maximum amount that can be borrowed in terms of collateral type, eligibility, and advance rates. CONTANGO - A circumstance in which the futures price of a commodity has risen above the futures spot price. A contango implies that investors are willing to pay a premium for delivery of a commodity in the future rather than pay the carrying costs of buying the commodity today and holding it. DEVELOPED RESERVES - Developed reserves are expected to be recovered from existing wells including reserves behind pipe. Improved recovery reserves are considered developed only after the necessary equipment has been installed, or when the costs to do so are relatively minor. Developed reserves may be sub-categorized as producing or non-producing. E&P - Exploration and Production. EXPLORATION - Prospecting for undiscovered petroleum. FIELD - An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impermeable rock, laterally by local geologic barriers, or both. It could be defined differently by regulatory authorities. MIDSTREAM SERVICES - Services provided to producers by the midstream firms include transportation, gathering, processing, and storage for natural gas, oil, and refined products. POSSIBLE RESERVES - Possible reserves are those unproved reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves. In this context, when probabilistic methods are used, there should be at least a 10% probability that the quantities actually recovered will equal or exceed the sum of estimated proved, plus probable, plus possible reserves. PROBABLE RESERVES - Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves. 6

7 Glossary of Oil & Gas Reserve Lending Terms PRODUCTION - The cumulative quantity of petroleum that has been recovered at a given date. While all recoverable resources are estimated and production is measured in terms of the sales product specifications, raw production (sales plus non-sales) quantities are also measured and required to support engineering analyses based on reservoir voidage. PROVED RESERVES - Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. Often referred to as P1, sometimes referred to as proven. PROVED DEVELOPED RESERVES - Proved Developed Reserves are those Proved Reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods. Improved recovery reserves can be considered as Proved Developed Reserves only after an improved recovery project has been installed and favorable response has occurred or is expected with a reasonable degree of certainty. PROVED DEVELOPED PRODUCING (PDP)- Reserves subcategorized as producing are expected to be recovered from completion intervals which are open and producing at the time of the estimate. Improved recovery reserves are considered producing only after the improved recovery project is in operation. PROVED DEVELOPED NON-PRODUCING (PDNP)- Reserves subcategorized as non-producing include shut-in and behind-pipe reserves. Shutin reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate, but which have not started producing, (2) wells which were shut-in for market conditions or pipeline connections, or (3) wells not capable of production for mechanical reasons. PROVED UNDEVELOPED RESERVES (PUD) - Proved Undeveloped Reserves are those Proved Reserves that are expected to be recovered from future wells and facilities, including future improved recovery projects which are anticipated with a high degree of certainty in reservoirs which have previously shown favorable response to improved recovery projects. REDETERMINATION - Reassessment (repricing) of the borrowing base. RESERVES - Are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must further satisfy four criteria: they must be discovered, recoverable, commercial, and remaining (as of the evaluation date) based on the development project(s) applied. Reserves are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by development and production status. Links to Definitions: 7