Debt Financing for Independent Oil & Gas Producing Companies

Identifying the right debt financing option for your O&G company is essential for future growth.

Are you in the process of identifying debt financing options for your independent O&G company? Various options may be available if your company is developing or acquiring a producing property.

The nature of upstream oil and gas production requires a continual stream of capital to sustain production as reserves are depleted. When funds run low, it can jeopardize future returns and the entire enterprise.

As an independent O&G company, your primary asset is your reserve. If you have a proven and developed reserve or are planning to acquire one, this blog can help you navigate the lending space.

Questions to Ask:

When considering different financing options, ask yourself the following questions:

  • What are your capital needs?
  • Do you have a clear plan on how you will utilize the capital?
  • Do you have a forecast for future projects and production timelines?
  • What is your closing timeline?
  • Are you open to selling equity as part of the deal?
  • What does your financial reporting look like?

Having your business plan and finances in order, and presenting your financial standing clearly and accurately, will be essential as you navigate the debt financing process.

Traditional Debt Financing for Producing Oil & Gas Companies

Traditional debt financing, facilitated through a bank or financial institution, involves a fixed loan with a set repayment period. However, payments can be burdensome in slow production months or when commodity prices drop.  Additionally, the bank’s general business guidelines and qualifications can be stringent and not developed with the oil and gas industry in mind.

Securing a line of credit is another option. Unlike a fixed loan, a line of credit allows you to draw on the loan until you reach your limit. Lines of credit, however, often come with higher interest rates because of their flexibility and may or may not be the best fit for financing E&P projects.

As your company grows, accessing capital tailored to your industry and needs becomes increasingly crucial, making it essential to identify a well-suited lender for your growth stage, risk tolerance, etc.

Production Lending for Oil & Gas Producing Companies

Production-based lending can offer several advantages for an independent Oil & Gas company. Here are some of the key benefits:

  1. Tailored to O&G Industry
  2. Easier Access to Capital
  3. Flexible Repayment
  4. Asset-Centric Approach
  5. Opportunity for Growth
  6. Lower/No Equity Dilution
  7. Risk Sharing

Production-based lending offers an O&G company a specialized and adaptable financing solution that aligns with its unique industry requirements. It provides access to capital and supports growth while preserving ownership and control over their operations.  Two of the most common lending structures are Reserve Based Lending (RBL) and Volumetric Production Payments (VPP).

Reserve-Based Lending for Independent Oil & Gas Companies

Reserve-based lending is explicitly designed for independent E&P companies. These deals are commonly completed through banks and represent loan amounts upwards of $10 million.

These loans often have a term of three to five years and can be used to fund acquisition and development costs for producing reserves. As production continues and increases, your company’s valuation increases, providing more cash flow for debt financing, which leads to more profits for your shareholders and investors.

One of the key benefits of using reserve-based lending is flexibility. The loan may be constantly re-evaluated based on production levels, with payments increasing in strong months and decreasing when production or prices decline.

Volumetric Production Payment

A VPP is a royalty interest from a producer’s working interests in oil and gas leases. Specifically, a company sells a percentage of the hydrocarbon production upfront as a cash payment.

A financing structure of this nature allows you to secure an advance of funds against a specified future production volume. While the sale of a VPP has some elements of a loan, the transaction may be considered more like an asset sale, and it may be that debt does not need to be reflected on your balance sheet.

This financing option has been used for decades and may help your company raise operating capital without losing equity or acquiring more debt. While VPPs are not without risk – commodity pricing, operational, and more – when used strategically, these financing vehicles can help your company access needed capital to fuel future growth.

Need Help Through the Debt Financing Process?

The O&G debt financing process can be nuanced and challenging, but fortunately, you can enlist help. Engaging a financial expert who works alongside you can provide invaluable direction and support. From preparing your financial documentation, going through the loan evaluation process, choosing suitable options, and even helping your team with different financial tasks after closing your loan, Sabre Financial Group can advise you every step of the way.

Connect with us to set up a consultation and learn more about our capital & financial advisory services for E&P companies.

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