What is APC?
A Capital Solution for the Oil and Gas Industry
- APC: a Producer conveys a certain volume of oil or gas to a Buyer for an upfront payment.
- A non-operating, non-expense bearing, Limited Term Royalty.
- It entitles the Buyer to a specified volume of oil / gas produced from the property each period of the agreed upon term of the VPP, (usually 3-4 years).
- The Buyer makes this advance payment at a discounted rate and hedges their position.
Benefits of APC
Superior to Equity and Bank Debt
- Equity financing can be difficult to obtain, most independents are too small for Banks as well as
Private Equity firms.
- No equity take-out
- Off balance sheet transaction
- Not bank debt
- Debt issuance can take 4-12 months to complete… APC’s can be enacted in 45–60 days.
What's in it for me?
- Producer receives upfront capital for their oil / gas and production. Option to utilize capital to improve their fields: re-works, re-completions, drilling PUD wells, etc.
- Any additional production is 100% accretive to the Producer. The APC is on a strict delivery schedule and does not participate in the upside.
- At the end of the term, all production reverts back to the producer, as the contract has been fulfilled.
- In an APC, shortfalls in delivery are to be made up in the ensuing months.
Ideal Characteristics for an APC
Producer and Assets
- Producing Reserves: 100% PDPs
- Diversification: Value distributed over a number of wells
- Favorable Economics: Properties are cost competitive
- Credit Worthy Producer: Solid credit quality
- Independent Engineering: Competent regional experience
- Overcollateralization: Healthy margin of excessproduction reduces concerns about execution risk
What are the Associated Risks?
- Reserve Risk: MINIMAL… the Buyer is only entitled to receive their return from specified leases, thus, they must rely solely on the related reserves.
- Commodity Price Risk: MINIMAL… The Buyer assumes the risk and hedges their positions.
- Delivery Risk: MINIMAL… Reduced by good engineering during due diligence and a Deed of Trust on the entire 100% ownership of the operator.
- Counter Party on the Hedge: MINIMAL… Hedges are done with BP, Cargill, Shell and Koch, gold standard credit firms.
Underwriting an APC Transaction - Kingfisher
- Determines Production Rates, Declines, Type Curves, etc
- Underwriting Department: Reviews the Raw Data, evaluating the possibility of doing an APC from a structural aspect
- Underwriting Department: Performs Financial Analysis, determining capital amount that will prospectively be allotted
- If Engineering and Development Plans are viable, issuance of a Preliminary Commitment Letter
- Upon satisfactory Phases I & II, issue a Final Commitment Letter
- Formal Legal Agreements drawn
Underwriting an APC Transaction - Producer
- Completes ‘Production Matrix’ that indicates Production Rates, Declines, WI /NRI’s, wellhead to WTI / HH Pricing, Severance, Development Plan to increase Production amounts
- Provide all pertinent due diligence: Third Party Engineering, Lease Operating Statements, Revenue Statements, Development Programs and Costs, Uses of Proceeds
- Complete Phase I. of formal Due Diligence Questionnaire
- 3rd party Engineering Review and Audit
- Phase II. Due Diligence
- Physical Inspection
Your Origination Partner
Advanced Production Capital
- Our Lending Partners focus on quality Management Teams
- APC’s are $1M. -15M. in capital requirements
- Our organization moves quickly and supports our Partners with follow-on capital
- We are liquid, have substantial dry powder and are looking for compelling development plans with good PDP production
- We target our commitments to pursue the highest conviction opportunities. When companies are serious, they move!
- Dozens of years of collective Oil / Gas & Structured Finance experience