Private U.S. oil and gas companies are increasingly turning to a niche financing structure that securitizes their production, providing a funding avenue for producers and owners as traditional sources become more expensive or simply dry up.
Known as PDP asset-backed securitizations , this product takes revenue generated by companies' proved, developing and producing oil and gas operations and uses that cash flow as collateral for a bond that is sold to investors.
While the first rated PDP securitization was completed in September 2019 by Raisa Energy, volatile commodity prices and a wave of producer bankruptcies in 2020 stymied its initial application. However, in the last year or so, and with commodity prices hitting multi-year highs in 2022, companies and investors have increasingly taken notice.
Ty Harrison, chief financial officer at PureWest, explained that a PDP securitization ring-fences oil and natural gas wells so that cash from them goes to servicing the debt. A robust hedging strategy ensures movements in commodity prices do not inhibit the ability to pay investors. The attraction stems from buyout firms being unable to sell or list companies at a better valuation than merely collecting profits generated from higher commodity prices. A securitization effectively pools the profits and distributes them to investors as an interim reward, allowing owners the time to find another exit during the ABS' lifespan - typically three to five years.
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