Upload
ramon-malden
View
233
Download
7
Tags:
Embed Size (px)
Citation preview
Wells Fargo Energy Capital
Michael NepveuxSenior Vice President
Presented to: IPAA Capital Markets Seminar January 16, 2008
2
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Who is the Wells Fargo Energy Group?
Quick Facts:Quick Facts:• Over three decades of lending to the Energy Over three decades of lending to the Energy
industryindustry• 105+ staff members in Houston, Dallas and 105+ staff members in Houston, Dallas and
DenverDenver• Our clients have revenues from $10MM to $50B+Our clients have revenues from $10MM to $50B+• Broad product offering including senior debt, Broad product offering including senior debt,
mezzanine debt, private equity, commodity and mezzanine debt, private equity, commodity and interest rate derivatives, and treasury interest rate derivatives, and treasury management.management.
• The mission of the Wells Fargo Energy Group is to The mission of the Wells Fargo Energy Group is to be the bank of choice for all segments of the be the bank of choice for all segments of the energy industryenergy industry
3
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Who is Wells Fargo Energy Capital?
Quick Facts:Quick Facts:• Headquartered in Houston with representatives in Headquartered in Houston with representatives in
Denver and PittsburghDenver and Pittsburgh• 11 professionals on staff 11 professionals on staff • Over $1B committed to the mezzanine finance sector Over $1B committed to the mezzanine finance sector
since 1996since 1996• In 2007 completed 43 deals totaling over $300MM In 2007 completed 43 deals totaling over $300MM • Funds provided for development drilling; highly Funds provided for development drilling; highly
leveraged acquisitions and bridge facilitiesleveraged acquisitions and bridge facilities• Make select equity investments in sponsored funds Make select equity investments in sponsored funds
and private companiesand private companies
4
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Wells Fargo Energy Group
$8.5$8.5BB
Energy Services & Energy Services & Equipment- 30%Equipment- 30%
Refining & Refining & Petrochemicals- 10%Petrochemicals- 10%
Exploration & Exploration & Production- 40%Production- 40%
Pipelines, Gathering Pipelines, Gathering & Processing- 20%& Processing- 20%
5
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Where Do We Fit in the Development Cycle?
Production
Start-Up Development Acquisition Development
Development Loan, Equity
Senior Revolver
Subordinated Debt, Equity
Syndicating Senior
Revolver
6
Developing RELATIONSHIPS. Providing SOLUTIONS.®
50+
5
10
15
20
25
30
35
40
45
PDP PDNP PUD Probable Possible
---------- Development/Exploitation ------------(Engineering Risk)
---------- Exploration -----------(Geologic/Geophysical Risk)
Bank Loan
0
Tar
get
Rat
e o
f R
etu
rn,
%
Reserve Risk
Mezzanine Debt
Equity
50+
5
10
15
20
25
30
35
40
45
PDP PDNP PUD Probable Possible
---------- Development/Exploitation ------------(Engineering Risk)
---------- Exploration -----------(Geologic/Geophysical Risk)
Bank Loan
0
Tar
get
Rat
e o
f R
etu
rn,
%
Reserve Risk
Mezzanine Debt(including sub debt and development loans)
Equity
Oil and Gas Industry Risk Spectrum
7
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Definition of Mezzanine Debt
Good solution for companies who:
Need capital to acquire and/or develop undeveloped reserves
Require more capital than commercial banks will provide
Don’t want to sell or bring in an industry partner
Want to avoid ownership dilution inherent in raising equity capital
Mezzanine (mĕz‘ ə-nēn) n. [from Latin, medianus middle, median]: An intermediate story, usually not of full width, between two main floors, especially the ground floor and the one above it.
Energy finance translation: a middle layer of capital, typically supported to a material extent by undeveloped reserves, with equity beneath and sometimes senior debt above; not meant to be a permanent or primary source of capital.
8
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Mezzanine Debt Market
Started in early/mid ’80s with TCW and RIMCO
Numerous players have come and gone since then (Enron, Aquila, Williams, Shell Capital, Mirant, etc.)
After Enron and merchant sector collapse, only TCW and WFEC remained active
Numerous new players today (BlackRock, GasRock, Macquarie, NGP Capital, PetroBridge, Guggenheim, RBS, Goldman, Prospect, etc.)
Hedge funds are also now active, but more selective in recent months
Competition has driven returns down and increased risk
Advantages of mezzanine debt versus:
Bank Debt Private Equity
higher advance rate less expensive
accelerates reserve development less control
limited or non-recourse (projects) easier to amend or increase
9
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Typical Mezzanine Structure and Pricing
Project Debt Secured with first lien $3MM - $50MM Fund development/acquisition of
proven reserves Bridges to conforming bank debt
if reserves not sold 1-3 year maturity IRR: 15% - 25%: Coupon Rate:
10% - 12%, ORRI < 5%, APO NPI 15% - 75%, warrants possibly
Cash Sweep: 75% - 95% Runs deposited in a cash
collateral account Commodity hedging typically
required
Subordinated Debt Secured with second lien $10MM+ Fund development/acquisition of
proven reserves; refinancings; recaps.
Advance Rate: senior + sub = up to 75% of NYMEX PV10%
Maturity set 6-12 mos. after senior maturity
IRR: 10% - 15% in the form of coupon; usually no equity kickers
Cash Sweep: no Commodity hedging usually
required Typically no borrowing base;
protection via asset coverage test (NYMEX PV10)
10
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Mezzanine Advantages vs. Conforming Bank
Mezz shops take more reserve risk than commercial banks
Smaller equity contribution required
Higher advance rates than commercial banks
Accelerate funding and development
Typically non-recourse
11
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Mezzanine Advantages vs. Private Equity
Retain greater portion of the upside
Cheaper way to finance a proved drilling program
Maintain control
Easier to exit
12
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Second Lien Market Domino Effect
As the subprime spiral spread, it affected the investment firms that managed
them and the hedge funds and other investors that bought them
When liquidity dried up arrangers were sitting on immense underwriting
positions which created an overhang in the debt markets
This liquidity squeeze pushed the entire market into price-discovery mode
and substantially increased risk aversion
High yield market “impaired but operational” – Treas. Sec. Paulson last
week. Volumes down sharply, spreads wider.
Oil and Gas 2nd Lien and mezzanine not immune. Markets are open, but at
wider credit spreads, reflecting investor appetite and liquidity.
13
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Market Trends
14
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Market Trends
Source: Bloomberg Source: Bloomberg
High Yield Credit Spreads: 01/02/02 - 01/10/08 High Yield Credit Spreads: 01/01/07 - 01/10/08
50
100
150
200
250
300
350
400
450
500
550
600
650
01/01/07 02/16/07 04/04/07 05/21/07 07/07/07 08/22/07 10/08/07 11/24/07 01/10/08
Sp
read
-to
-Wo
rst
(bp
s)
HY IG
0
200
400
600
800
1000
1200
01/02/02 10/03/02 07/05/03 04/05/04 01/05/05 10/07/05 07/09/06 04/10/07 01/10/08
Sp
read
-to
-Wo
rst
(bp
s)
HY IG
15
Developing RELATIONSHIPS. Providing SOLUTIONS.®
Contacts
Mark Green Gary Milavec
President Senior Vice President
713-319-1327 724-942-5839
mark.m.green@ wellsfargo.com [email protected]
Chris Carter Michael Nepveux
Vice President Senior Vice President
713-319-1369 303-863-5589
Thank you