Frackers Float ‘Shale Bonds’ as Traditional Investors Flee

By October 20, 2019 No Comments

Desperate for cash, shale companies are trying to court investors with a new and potentially risky financial instrument that resembles mortgage bonds.

The companies are floating a type of asset-backed security that involves existing oil and gas wells. Producers transfer ownership interests in the wells to special entities that then issue bonds to be paid off by the output from the wells over time.

Raisa Energy LLC, a Denver-based oil-and-gas company backed by private equity firm EnCap Investments LP, closed the first such offering in September and several others are planned before the end of the year, said people familiar with the transactions. The bonds will pay nearly 6% interest on the best quality wells, the people said, with higher rates on riskier assets.


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The investments are drawing attention from insurance companies, large money managers and other traditional investors of asset-backed securities. They represent a new avenue for shale companies as the industry’s traditional investors sour on the sector following years of disappointing returns.

While similar in structure to securities backed by mortgages and auto loans, the securities pose potential risks because projecting the long-term output from shale wells remains an inexact science. Shale drilling only became a widespread method of extracting oil and gas in the past two decades. Modelling future production has proven difficult because of the complex geology of shale basins and large variability from one well to the next, engineers say.

Thousands of shale wells drilled in the past five years are pumping less oil and gas than their owners forecast to investors, The Wall Street Journal previously reported.

Investors will have to rely on companies’ estimates to model potential returns, said Harrison Williams, managing principal at Core Energy Advisors, which advises producers on asset sales.

“The pitfalls are in the underwriting: Is the oil and gas there and will it come out?” Mr. Williams said. “Sometimes predicting reserves has a large component of art as well as science.”

Fixed-income investors are willing to take risks after years of low interest rates, said

John McElravey,

head of consumer asset-backed security research at

Wells Fargo.

Comparable nontraditional securities include aircraft and railcar leases, which have similar credit scores to the shale securitizations but lower interest rates of around 4.5% or less.

“There’s a lot of cash out there to put to work and plenty of folks willing to take those risks,” Mr. McElravey said.

Raisa, which owns nonoperating interests in wells across the country, privately offered its stakes in about 700 wells across the U.S., according to its chief executive,

Luis Rodriguez.

He declined to provide details about the offering, including how much it raised, but said the wells were old enough that production can be modelled with relative accuracy.

“Oil and gas has always been an intriguing place where people think there is a return, but they have a hard time getting their head around the risk,” Mr. Rodriguez said. “Investors don’t want to own the companies’ equities, but this is investment grade.”

Existing shale investors have all but cut off new influxes of cash after producers burned through more than $100 billion beyond what they earned since the beginning of 2014. Shale equity and bond issuances are at their lowest level in years, and the vast majority of companies expect banks to lower their revolving lines of credit in coming months, according to a survey by law firm Haynes and Boone LLP.

Securitizing wells may be one of the few sources of new money available to producers, said

Jonathan Ayre,

a partner at law firm Orrick Herrington & Sutcliffe LLP. It The firm is working with Guggenheim Securities, which also structured Raisa’s offering, on a similar securitization.

“The appetite is definitely out there,” Mr. Ayre said. “For oil and gas companies looking to monetize their investments, there are not a ton of good options.”

Mr. Ayre said the deals have built-in protections for investors, including in the event of bankruptcy. The securities would technically be unaffected by the bankruptcy of the company operating the wells, because the ownership interests are transferred to the special entity.

Still, there could be uncertainty if the operator goes bankrupt and can no longer operate the wells, said

Ed Hirs,

a natural-resources fellow for BDO USA LLP. Shale bankruptcies have increased this year and could grow further as many producers face large debt maturities. Other asset-backed securities, like mortgages, are easier to foreclose on in bankruptcy while wells would be difficult to repossess, Mr. Hirs said.

“No one can go out to the oilfield and grab a working interest,” he said.

The U.S. has more than doubled its crude output over the last decade. Much of the growth is due to the Permian Basin of West Texas and New Mexico. WSJ traces the hotspot of North America’s crude oil boom, with a look at challenges that producers in the region face.

Write to Christopher M. Matthews at

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