Buy PDP Now! Proven Developed Production (PDP) is the hot item this month in the oil and gas exploration industry.
For non-oil and gas folks, PDP simply means the oil, natural gas, or natural gas liquids are coming out of the ground right now and their immediate economic value.
Why is this a great time to buy PDP?
Well it’s the end of the year and oil producers are looking to make their property portfolios and balance sheets look the best they can be for their shareholders. For the next sixty days or so, oil producers big and small will be selling off their less than perfect properties to raise money to move into more productive fields while oil prices are relatively low. So, now is a great time to shop and acquire some of the better non-core PDP assets of small cap, mid-cap, and large cap oil producers making portfolio adjustments.
#1 reason to buy PDP Now: Inventory is Still Good
Right now, many large oil producers like ConocoPhillips, Apache, and BP are identifying the PDP properties they plan to sell in the first quarter of 2017. They are getting the data rooms set up for the properties and getting ready to open the bidding.
While most property available through auction boards are lease properties without existing production, there will be many properties that have 800 – 1,500 boe/d (barrel of oil equivalent per day). These properties will be offered for sale the next three to four weeks. There will also be many properties off the public listing sites that are for sale only through private sources.
Business Finance Solutions helps E&P companies finance PDP properties. We have found that the easiest properties to finance are the ones that have a good amount of existing production, and for whatever reason are no longer attractive to their current owners. The best properties for quick financing should also have upside potential with locations on the lease to drill new wells (PUD). If the new operator can decrease operating costs or increase production the deal is golden.
In our opinion the best properties, are those where natural gas and condensates represent less than 50% of the total produced petroleum volume.
Even though the price of oil is in the low 50s right now, the price is still too low for large E&P companies to justify keeping wells that are not 500 boe/d producers. Large E&P companies need prices in the mid $60s to make the production profitable on these lower producers, but small operators can make a profit at a much lower price point.
#2 reason to buy PDP Now: Financing Is Available
Although regulated energy banks have stopped making loans to most small E&P companies, private equity funds still have deep pockets ready to invest as equity partners or loan as mezzanine capital.
Private equity funds are picky about which companies they will back, but if you have a great management team and solid growth plan, money is available for PDP deals. Business Finance Solutions has relationships with many private equity funds that finance existing production (PDP).
There are as many ways to finance the purchase of existing PDP as there are private equity funds available to bring money to the table. All you need is a little patience and an open mind to craft a financing plan that fits both your company’s goals and the funds ROI goals.
#3 reason to buy PDP Now: The Upside Potential Is Enormous
The short-term upside of buying an existing field is immediate positive cash flow. A smart operator can also increase profits by reducing operating expenses.
In most cases, large companies have high overhead costs that erode the ROI on profitable properties. A small E&P company may be able to decrease operating cost by 10% to 30% from day one of ownership. These operational savings mean immediately higher profits from the same property.
Mid-term upside potential can be created by making repairs and upgrading equipment on existing wells to ensure all wells are working and producing. Smaller E&P companies can give more attention to the upkeep of all their wells than can mid-sized or large E&P companies who only focus on their “prime producers”.
Long-term upside potential can be created by drilling new wells. Drilling shallow or conventional wells can produce modest amounts of new productions and profits, even with today’s low oil prices.
We have one client who has identified five conventional wells to drill in 2017 for a total cost of about $2.3 million. Expected production should be about 150 boe/d. With a low decline curve, this type of well is quick to pay back and does not present significant financial risk to drill.
Business Finance Solutions has help small E&P companies finance their growth strategies. We have also worked with accidental entrepreneurs, those seasoned oil and gas professional who have ventured out on their own and built scrappy teams to capitalize on good opportunities. In either case, our team of business strategists help our clients craft a business case for the funding they need to take advantage of market opportunities. We also handle the introductions and negotiations with equity funds, to achieve the best financing solutions for our clients.
Call us at 512.990.8756, or contact us via email if you are considering a PDP acquisition strategy. We will be happy to share our insights and assist you