Spending by exploration and production companies is expected to reach record highs in 2014, according to reports from Barclays. Capital directed at North American shale plays is expected to rise due to tumultuous environments overseas, further fueling the United States’ climb toward the title of the world’s top energy producer.
Oil and gas companies typically abide by the, “If you’re not growing, you’re dying,” mantra, and are constantly seeking to expand operations and boost returns. But with horizontal drilling and completions in the shale basins running between $5 million and $10 million per well, and companies listing thousands of drilling locations in inventory, there will be a steady demand for larger amounts of cash to develop their leased acreage into producing oil and gas wells.
Companies who are plotting substantial growth in the E&P business typically have limited options for financing a growth plan: issue debt, do an equity raise (IPO if a private company or secondary offering if public), or look toward private equity financing.
Irving, Texas based NGP Capital Resource Partners (ticker: NGPC) is a closed-end, non-diversified business development company that can aid in E&P development. The company has invested in more than 260 companies and managed approximately $13 billion of cumulative committed capital since its inception in 1988. It primarily invests with private companies using senior secured to mezzanine loans, but will also engage in equity deals.
Global Spending Landscape
In all, Barclays estimates global E&P spending to reach $712 billion – a 6% increase compared to 2013. Interestingly, supermajor spending is slightly declining after forking over big bucks for massive projects in recent years. ExxonMobil (ticker: XOM), for example, plans to cut its expenditures by nearly $3 billion by 2017.
Smaller companies, on the other hand, are expected to drive capital expenditures growth, said the Barclays report. Such companies can nimbly move throughout plays without requiring a tremendous capital investment in order to be feasible. Supermajors generally show less interest in smaller projects.
Debt vs. Equity Financing
NGP fits into the scheme of smaller companies and can provide a variety of custom solutions for its clients.
Debt: Mature companies not interested in diluting ownership are more likely to opt for either a senior or mezzanine loan. Senior loans are the less expensive of the two but may involve more extensive covenants that kick in if the notes are not repaid.
According to the Energy Information Administration, uses of cash (i.e. debt, dividends, share repurchases) are outpacing cash from operations by more than $100 billion in 2014. “The low borrowing rates are attractive to companies,” the EIA says. “Using debt to fuel growth is a typical strategy, particularly among smaller producers. The increased debt load is anticipated to be met with increased production, generating more revenue to service future debt payments.”
Private Equity Financing: Senior loans may not meet the capital requirements for a high-growth company, so private equity financing is another option. Equity financing dilutes shares of the company (a route not many firms are willing to take, particularly in an era of stock buybacks), but it gives the private equity company incentive to help assure the success of its investment. This route can come with guidance to the E&P’s management team, especially if the company has reached a turning point in its development.
Mezzanine, or subordinated loans, are somewhat of a halfway point between senior loans and private equity financing and involve both debt and a share of ownership. Interest rates are higher than senior notes but are seen as an acceptable option for stable, moderate growth companies.
Source: Ernst & Young
NGP’s Track Record
NGP Capital Management has formed four spokes for its investment platform: Natural Gas Partners, NGP Global Agribusiness Partners, NGP Capital Resources Company and NGP Energy Technology Partners, L.P.
Natural Gas Partners commands the lion’s share of E&P investments, committing $10.5 billion (more than 80%) of the company’s $13 billion in investments to date. Four companies backed financially by NGP have completed their respective initial public offering since December 2013, including Rice Energy (ticker: RICE), RSP Permian (ticker: RSPP) and Memorial Resource Development (ticker: MRD). The offerings raised nearly $1 billion in capital. The fourth, PennTex Midstream, announced its IPO filing on October 2, 2014. Citigroup, Barclays, RBC Capital Markets and Tudor Pickering Holt & Co are the lead underwriters for the estimated $150 million IPO, in which NGP Energy Capital Management has made a commitment.
Two additional companies, Bravo Natural Resources and Catapult Energy Services, have been formed from NGP’s financial commitments since 2013.
The industry has taken notice: NGP was ranked among the top 20 private equity firms worldwide by Private Equity International. In 2014, two members were named to Dallas Business Journal’s “Who’s Who in Energy” list and Ernst & Young awarded Kenneth A. Hersh, co-founder and CEO of NGP, as the Master Entrepreneur of The Year for the Southern Region.
The capital invested in private equity has risen every year since 2009, according to Ernst & Young, and it is expected to continue to rise in the short term. The shale boom, and in the longer term, the LNG market, will continue the demand for capital. While changes in the debt field in regards to interest rates are relatively unknown at this time, private equity is believed to be a constant. An Ernst & Young partner said, “There is strong demand for private capital, and PE firms know how to make good use of this to make good returns for themselves.”
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