American Oil and Gas Reporter - May 2021 - 38

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SpecialReport: Capital Sourcing
Adams comments. " Every company has
at least one bank, and often has close relationships with its bankers, especially
when it banks locally or regionally. So,
yes, banks will be able to win that business
back if they want to, and the market is
such that bank financing can provide
what companies need. "
Public markets also remain open at

Funding Cycles
Fiscal discipline by operators and attractive rates of return for the market
will encourage public capital to take a
fresh look at upstream independents,
Adams suggests. " Public companies seem
to be more sensitive to public perception,
and therefore, make decisions many times

" Those that can will grow through self-funding,
but many who can do that still like to share risk with
partners . . . We will continue to cycle between growth
with outside money and funding operations and growth
strictly out of cash flow. "

WESLEY ADAMS | Energy Advisors Group

least a crack. Late in March, Vine Energy
announced that the underwriters of its
previously announced initial public offering of 21.5 million shares of its Class
A common stock fully exercised their
option to purchase an additional 3.225
million shares at the IPO price of
$14/share, less the underwriting discounts
and commissions, resulting in additional
net proceeds of approximately $43 million.
Citigroup, Credit Suisse, Morgan Stanley,
Barclays, BofA Securities and RBC Capital Markets acted as joint book-running
managers for the offering.
As if an IPO of an upstream independent shale player was not rare enough,
Vine is neither in the Permian nor oilweighted. It produces mostly dry gas in
the Haynesville and Middle Bossier
plays.
As operators improve their economics
and financial self-discipline, Adams notes
that they will be able to fund more development on their own. That increasing
self-sufficiency makes them a better risk.
He reiterates the adage that every mortgage
applicant knows: Banks tend to lend to
those who can prove they do not need
the money.
" I think those that can will grow
through self-funding, but many who can
do that still like to share risk with partners, "
he remarks. " The focus right now is fiscal
discipline. Wall Street is punishing growth
and is focused on alternatives, so operators
do not have much choice in the matter. "
38 THE AMERICAN OIL & GAS REPORTER

based on public opinion rather than market
fundamentals. "
Patience is the key virtue, Adams stresses. " There will always be funding cycles.
Private equity will come back around if
there are not as attractive alternative investments. Banks will only be useful to
those that do not need the money, but
want to borrow instead of spend their own
capital unless sellers come down on their
expectations, " he says. " We will continue
to cycle between growth with outside
money and funding operations and growth
strictly out of cash flow. Companies cannot
become impatient and try to grow faster
than cash flow allows. Otherwise, they
risk cycling back to trying to live on cash
flow from operations. "
Private money-both equity and debt-
remains a major source of both operating
expenses and capital expenses for independents. There seems to be plenty of
money, plenty of limited partners willing
to invest and no reluctance by general
partners or management firms to lather,
rinse and repeat with experienced management teams, according to Adams.
" Teams that have made significant
money for their backers tend to get taken
care of until either the money tires of the
space, the management team dissolves
or it just cannot find any good projects, "
Adams says. " I think that capital realizes
that oil and gas is not going to be replaced
any time soon, so providers want to be
ready to act when the next price spike

occurs or when a downturn occurs and
they can buy assets cheaper. "
Reviewing alternative forms of funding,
Adams indicates " there is a lot of activity
in the nonoperated arena, especially in
drilling in the Midland and Delaware
basins, as well as some in the Haynesville. "
In contrast, he adds that the issue with
mezzanine financing is that the projects
have to have enough margin to accommodate the cost of capital. " Structured deals
like volumetric production payments, term
overrides, and other arrangements are
being discussed. Trading workover capital
for working interest is also popping up. "
Energy Advisors Group is on a buyside retainer for a group with funds for
that purpose. " I am constantly on the
lookout for new types of capital, " Adams
says, " but the Achilles' heel always seems
to be a lack of equity provided by the
management team to satisfy the lenders.
The biggest key to getting funded is
having money in the form of cash or existing production.
" I am not seeing much capital available
to pay overhead for new teams with no
assets and no cash to put into the projects
they want to do, " he continues. " The lone
exception is those willing to fund
workovers to get that production, but that
even requires having an asset to workover. "
Select Transactions
Across the industry, independent companies are finding capital harder to come
by, relates David Morris, managing director
of Opportune LLP's restructuring practice
based in Dallas. " I think all lenders and investors in the oil and gas industry have become more selective about the new transactions they fund, " he comments. " It is not
just the commercial banks. This observation
seems consistent with the responses in
Haynes and Boone's spring 2021 survey. "
In terms of sources of capital, Morris
notes, respondents to the survey indicated
that operating cash flow would be the
primary source of capital (24%). That
was followed by debt from capital markets
(14%), banks (13%) and alternative lenders
(12%). " We have seen significant bond
issuances in the first quarter of 2021, but
there are many companies that cannot access the high-yield market, " Morris adds.
For all the hesitancy in lending, RBL
options provided by commercial banks
remain the least expensive source of capital
for upstream independents, Morris states.
" It is hard to imagine that executives will

American Oil and Gas Reporter - May 2021

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