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Goldman Sachs Commodity Linked Financing IPAA Conference A presentation by Goldman, Sachs & Co. Commodity Risk Manag PowerPoint Presentation
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Goldman Sachs Commodity Linked Financing IPAA Conference A presentation by Goldman, Sachs & Co. Commodity Risk Management (212) 902-0776 April 2005. Goldman Sachs Commodities/J Aron.

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slide1

Goldman Sachs

Commodity Linked Financing

IPAA Conference

A presentation by Goldman, Sachs & Co.

Commodity Risk Management

(212) 902-0776

April 2005

goldman sachs commodities j aron
Goldman Sachs Commodities/J Aron
  • J. Aron is the commodities risk management business of Goldman Sachs and receives the full corporate guarantee of the Goldman Sachs Group (A+/Aa3)
  • Founded in 1892 and acquired by Goldman Sachs in 1981
  • Currently employs approximately 200 professionals globally in 6 regional offices (New York, London, Singapore, Tokyo, Sydney and Calgary)
  • Voted 2004 Commodity Derivatives House of the Year by Risk Magazine
  • Recent Business Initiatives
    • Underwritten or principaled over $6.5Bn worth of commodity liked-financings in the past 10 months
    • On staff petroleum engineers allow us to take oil and gas reserve risk in derivative and financing transactions
      • Asset Secured Hedging Facilities
      • Volumetric Production Payments
      • Production-Contingent Derivatives
    • Through GS E&P Capital, over $100MM of development financing commitments to the North American oil and gas industry in 2004
goldman sachs e p capital
Goldman Sachs E&P Capital
  • Houston based principal investing effort for Goldman Sachs
    • Investing Goldman’s balance sheet
    • 5 energy specialist with 16 years average experience
    • 3 Petroleum Engineers on staff
  • Flexibility in transaction structure
    • Junior and/or Senior Debt
    • VPPs
    • Drilling partnerships
    • Preferred Equity
  • Flexibility in transaction size
    • $15mm – several hundred million
    • Seeking principal opportunities, but can arrange a transaction of any size
    • Desire to build relationships with follow on investments
    • Can provide capital markets exit
  • Flexibility in commodity hedging
    • Long-term, asset-secured hedging
    • Elimination of cash collateral requirements
four basic structures for e p debt debt like investments
Four Basic Structures for E&P Debt (Debt Like) Investments
  • Senior Revolving Debt
    • Corporate debt
    • Fully secured with financial and asset-based covenant package
    • Advance rates subject to semi-annual borrowing base
    • Mostly PDP driven valuation, 1.75 Coverage Ratio
    • Libor + 125-300
    • Typically 2-3 year maturity, no prepayment penalties
    • May include stretch tranche under same security package
    • Proceeds available for general corporate purposes
  • Volumetric Production Payments
    • Not debt; sale of a real property interest
    • No covenant package
    • Operating and delivery obligations often secured by retained interest
    • Typically 100% PDP with some flexibility to monetize PDNP
    • Periodic coverage ratio of 1.25-1.75
    • Pricing 6-12%
    • Typically 4-7 year term
    • No restrictions on use of proceeds
four basic structures for e p debt debt like investments6
Four Basic Structures for E&P Debt (Debt Like) Investments
  • 2nd Lien
    • Corporate debt
    • Fully secured but subordinated to senior revolver
    • More relaxed covenant package
    • 75% PDP, 1.5 Coverage Ratio
    • Libor + 400-800
    • Term debt; 3+ years with prepayment penalties
    • Proceeds available for general corporate purposes
  • Mezzanine Debt
    • Corporate debt
    • Security and covenant package highly customized
    • 10 - 50% PDP, 1.5 Coverage Ratio
    • 8-10% coupon plus some upside participation, 12-15% all-in
    • Term debt; 3+ years with prepayment penalties
    • Specific use of proceeds, typically funding of approved drilling program
energy high yield bond returns
Energy High Yield Bond Returns

Credit spreads have tightened over the past five years as interest rates have declined and commodity prices have increased

increasing valuations
Increasing Valuations

On a $/boe basis, average acquisition prices paid have grown substantially along with crude prices since 1999

goldman sachs commodity markets
Goldman Sachs Commodity Markets

Source: Goldman Sachs

north american natural gas basis markets
North American Natural Gas Basis Markets

Goldman Sachs is a leading financial and physical dealer for swaps and options at these and many other locations.

AECO

Sumas

Texas Eastern M-3

Northwest Rockies

Transco Zone 6 Non-New York

Chicago Citygate

Ventura

CIG

Panhandle

ANR Oklahoma

San Juan

Southern California

Sonat

Permian

NGPL Texas-Oklahoma

Henry Hub

Waha

Houston Ship Channel

Source: Goldman Sachs

production payments
Production Payments
  • Volumetric Production Payment
    • Nothing new, have been around since the 1930s
    • Not debt, but the sale of a real property interest
    • E&P Company sells VPP to financial buyer
    • Delivery obligation is volumetric; discount rate is not explicitly stated
  • Underlying instrument is a Term Overriding Royalty Interest
    • Non-cost, non-expense bearing interest
    • Property specific burden, recorded conveyance
    • Seller has ongoing obligations to operate and deliver/market production
  • Seller must deliver volumes each month
    • Seller does not guarantee volumes, buyer can only look to specific property for volumes
    • Typically 100% hedged by VPP buyer
    • Some limitations on what seller can do with properties
volumetric production payments
Volumetric Production Payments
  • Principal factors determining size and pricing
    • Reserve mix – needs to have large percentage of PDP
    • Value diversity – no value concentration in a few wells
    • Periodic coverage – projected volumes available each month compared to volumes required to be delivered
    • Tail – the amount of reserves expected to be remaining at the termination of the production payment
    • Regional basis markets and available market points
    • Seller’s operating capabilities and creditworthiness
  • Alternative: Dollar Denominated or Financial Production Payment
    • No delivery schedule, rather buyer receives a fixed percentage of production
    • Discount rate/IRR hurdle is explicitly stated
    • Large percentage of production still hedged, but not 100%.
    • More flexibility in hedge structure
    • Easier to handle non-producing and undeveloped reserves
    • Easier to handle two phases (both oil and gas)
case study volumetric production payment
Case Study: Volumetric Production Payment
  • In 2004, GS E&P Capital purchased a VPP for $15mm from a private seller
  • The VPP burdens long-lived properties in the Arkoma Basin
  • Goldman Sachs and the Seller arranged for the Seller to market the VPP production on behalf of Goldman Sachs
  • The price received under the marketing arrangement is linked to an appropriate basis location
  • Goldman Sachs hedged its price risk financially at closing; seller has no exposure to basis risk (other than physical vs. financial spreads)

Volumes

LOE

VPP Volumes

Retained Interest

Time

second lien case study belden blake corporation
Second Lien Case Study: Belden & Blake Corporation

$170.0 million Senior Secured Credit Facilities

$192.5 million Senior Secured Notes

1 Up to $15mm of LCs can be issued to support the hedges.

second lien case study belden blake corporation15
Second Lien Case Study: Belden & Blake Corporation

$170.0 million Senior Secured Credit Facilities

$192.5 million Senior Secured Notes

1 Pricing on LC facility and revolver can step down to L+250 bps and L+225 bps based on specific leverage levels.

2 Pricing on term loan can step down to L+250 bps based on specific leverage levels.

current trends
Current Trends
  • New money from non-traditional sources
    • Hedge funds, investment banks; non-energy commercial banks
    • Chasing yield; rates and credit spreads at historically low levels
  • Intense competition among capital providers
    • Private equity in abundance
    • Lenders willing to lend more and accept lower yield
    • Traditional mezzanine financing being crowded out by aggressive 2nd lien and private equity capital
  • Unconventional Gas Plays
    • CBM, shale gas, tight sands plays offer the scale and risk profile to attract significant capital
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Primary Financing Factors for Small Cap E&P Companies

  • Track record
    • Operating history, financial performance
    • Reputation
  • Size and Nature of Financing
    • < $10mm; $10mm - $50mm; > $50mm
    • Specific future growth opportunities available
    • Is cash flow available to pay current interest, amortize debt?
    • Use of proceeds
  • Perceived Risk / Asset Mix
    • Percentage of PDP reserves
    • Location (onshore vs. offshore, conventional vs. unconventional)
    • Nature and potential of growth opportunities
  • Term objectives
    • Up to 3 years; 3-5 years; > 5 years
  • The perceived risk of a given opportunity will vary significantly among capital providers
  • Private Deals are difficult to benchmark; terms generally not disclosed
  • Capital providers are forced to rely upon their past experience and inexact comparisons
slide19

Contacts

  • Commodities (New York)
    • Colleen Foster (212 902 0776)
    • Simon Collier (212 902 0776)
  • GS E&P Capital (Houston)
    • Kurt Talbot (713 658 2680)
    • John Howie (713 658 2682)
slide20

Disclaimer

This material has been prepared specifically for you by the Fixed Income Trading/Sales Department and is not the product of Fixed Income Research. We are not soliciting any action based upon this material. Opinions expressed are our present opinions only. The material is based upon information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Certain transactions, including those involving futures, options and high yield securities, give rise to substantial risk and are not suitable for all investors. We, or persons involved in the preparation or issuance of this material, may from time to time, have long or short positions in, and buy or sell, the securities, futures or options identical with or related to those mentioned herein. Goldman Sachs does not provide accounting, tax or legal advice; such matters should be discussed with your advisors and or counsel. In addition, we mutually agree that, subject to applicable law, you may disclose any and all aspects of this material that are necessary to support any U.S. federal income tax benefits, without Goldman Sachs imposing any limitation of any kind. This material has been issued by Goldman, Sachs & Co. and has been approved by Goldman Sachs International, which is regulated by The Securities and Futures Authority, in connection with its distribution in the United Kingdom and by Goldman Sachs Canada in connection with its distribution in Canada. Further information on any of the securities, futures or options mentioned in this material may be obtained upon request and for this purpose persons in Italy should contact Goldman Sachs S.I.M. S.p.A. in Milan, or at its London branch office at 133 Fleet Street.