Mick & Associates Energy Developments - August, 2012
This month, we continue to report developments that have been brought to our attention recently concerning certain private oil and gas program sponsors. We have also included some commentary about oil and gas due diligence from a perspective of economics and performance and recent July, 2012 market developments in this newsletter (with natural gas prices seeing some improvement from what was reported in our last newsletter in June, 2012).
As was reported last month, a complete list of oil and gas opinions available for review is provided at the bottom of this newsletter. To request a copy of any of these opinions, please email Joanne Balok at firstname.lastname@example.org.
Please let us know what you think via our website at www.mickandassociates.com or email
email@example.com. Feel free to share this newsletter with your registered reps, IARs or trust officers, as applicable. Also, if there are developments you would like for us to address in future newsletters, please let us know.
Bradford A. Updike, JD, CSA, Editor
Bryan S. Mick, JD, MBA, Editor
Mick & Associates, P.C., LLO
(402) 504-1710 (main)
(402) 504-3950 (Bryan office)
(402) 880-4960 (Bryan mobile)
|Top Stories and News|
ICON Oil & Gas Releases its Public Program.
The ICON Oil & Gas Fund is a publicly registered $200 million drilling program that is now effective in forty-four (44) states. Those leading the management efforts of the fund day-to-day are John Abney, a Managing Director of the fund, who has been involved in all phases of oil and gas operations for 33 years, Paul Bryden, who is the fund's Vice President and Senior Geologist and comes to ICON with 34 years of industry experience (and was a featured panelist at our symposium in Dallas last spring), and Steven R. Hash, P.E., who serves the fund as Chief Engineer and comes to ICON with 30-plus years of industry experience as well. Again, this is a registered product that will be sold by Prospectus and will have periodic financial reporting obligations with the SEC.
Magnum Hunter Resources Closes Bakken Shale Acquisition.
Bakken Hunter, LLC, a wholly-owned subsidiary of Magnum Hunter Resources (NYSE: MHR), recently entered into and closed a Purchase and Sale Agreement with Baytex Energy USA Ltd., an affiliate of Baytex Energy Corporation. Pursuant to the Purchase Agreement, Bakken Hunter purchased all of Baytex's non-operated working interest in oil and gas properties and wells located in Divide and Burke Counties of North Dakota (in the core of the Bakken Shale Play of North Dakota), within an area that is subject to an operating agreement among Samson Resources Company, Baytex, and Williston Hunter, Inc., also a wholly-owned subsidiary of MHR. The purchase price of the Bakken assets was $311 million in cash, subject to adjustments for certain customary items. Some bullet-point highlights of the sale are reported below:
- Properties are situated in Burke and Divide Counties of North Dakota;
- 50,414 net acres of lease rights acquired in area operated by Samson;
- 17,745 acres have been unitized;
- 800 gross drilling locations (300 Bakken and 500 Sanish Three Forks);
- Total proved reserves are currently 8.7 MMBOE (93% oil) with PV 10 value of $150 million;
- 43,788 undeveloped acres acquired with no reserve bookings at implied price of $3,663 per acre.
Mick & Associates Oil & Gas Drilling Program Rankings.
Our annual cash-on-cash study is being finalized and will be available to you August 3, 2012 (This Friday). To request a copy of this report, please email Joanne Balok at firstname.lastname@example.org. Please note that this report may not include some oil and gas sponsors and offerings that have been rejected by our firm, and one firm requested not to be included.
Mick & Associates Discusses Oil & Gas Due Diligence at Summer REISA Conference. The oil and gas presentation given on July 12th at the REISA Scottsdale due diligence conference approached the subject of energy product evaluation from an insightful perspective. Unlike the typical panels of the past that focus upon product types and "what-to-do" practices, this session focused upon the all important question of what attributes set the better performing energy sponsors apart from the pack. Other topics of discussion included economic modeling practices, energy program screening, and the commonly misunderstood principles of retail oil and gas investing.
The panel presenters included Mr. Updike, attorney of Mick & Associates, P.C., Mr. Mick, President, owner, and attorney of Mick & Associates, P.C., Joe Miller, CEO of Independent Financial Group, and Justin Reich, President of APEX Energy, LLC. Four brief "points-of-light" from the presentation that will serve you well in future due diligence endeavors include the following (with our focus, for discussion purposes, being directed at drilling programs):
1. The Economics of Oil & Gas Offerings Have Many Moving Parts. There is a tendency for due diligence personnel to focus on just one or two economic aspects of these programs (e.g. Net Revenue Interest, or "NRI", and the load) without giving due regard to the overall cash return picture under reasonable production-related assumptions (e.g. such as the return on investment, IRR, and return-of-capital profile of the projects being sold). This is where assistance from third-party due diligence law firms and their technical consultants (e.g. engineers and geologists) can be very useful.
While return opportunities vary greatly by area and drilling risk, reasoned pro forma return characteristics may range from perhaps 10-20% IRR and a 5-10 year return of capital in developmental programs, to 30%-plus IRRs and a 1-3 year return of capital in exploratory-type programs on a mid-case production assumption (with the mid-case representing "average" production results). The idea here is that the return potential should be commensurate with the drilling risk involved.
Being able to comprehend the economic potential of a program requires a review of several moving parts that begins with the program net revenue interest and load-adjusted drilling cost, and also considers the net revenue potential of the well projects reviewed, which is affected by the oil and gas reserves, future market pricing, transportation costs, production taxes, ongoing operating costs, fund management fees, sponsor carried interests, and fund administrative expenses. While tax benefits of pass-through drilling costs are a noteworthy aspect of these programs (with potentially $35,000 - $40,000 of federal and state taxes saved on a $100,000 investment in some programs), you need to understand the operational aspect of the return as well to appreciate how the product will benefit (or potentially hurt) the investor's portfolio. Again, the "total return" question requires an understanding of multiple economic components.
2. Good Performers Share Common Attributes. Based upon a comparative review of many sponsors that sell retail drilling programs, there are certain attributes that seem to be common among those with better track records of cash-on-cash returns. Regardless of the sponsor's status as an operator or non-operator, the better performers tend to have acquired a significant base of technical and operational knowledge within certain geographic trends (as opposed to "chasing" the next hot play). Good performance tends to also be observed in sponsors whose economic interests are aligned with those of the investors (e.g., by having a significant amount of money, net of offering compensation, invested, or by having a substantial part of the sponsor compensation tied to production). Additionally, better performing sponsors have noteworthy expertise in all facets of front office and back office operations (e.g., project management and accounting), with the management team likewise having supervised the sponsor's operations in up and down markets. A good overall financial status also tends to be commonplace within this group of sponsors (which suggests they don't have to over-charge the programs to stay in business).
3. Ask for Economic Models. Based upon my conversations with a number of oil and gas sponsors, many broker-dealers and RIA's do not request the sponsor's economic models as a part of their due diligence. A review of economic model data, however, is helpful for a number of reasons. First, such data can be helpful in determining whether the sponsor really understands the economic considerations of its project areas. Second, the data from the model can help you understand what facts and circumstances must come to fruition in order for the offering to deliver a competitive risk-adjusted return to the investor (e.g., with estimated oil and gas production, future oil and gas prices, and assumed depletion being three of many critical data points in the economic review of the offering). Even in offerings involving blind pools, a review of models on selected past projects will tell you whether the sponsor is looking carefully and reasonably at the return potential of its projects (with outside expert guidance again being helpful in this function).
4. All Natural Gas Plays Are Not Made Alike. In the wake of a depressed gas market, there has been an understandable gravitation from a sponsor perspective to projects that produce high amounts of oil. Notwithstanding this trend, there are a number of natural gas plays that produce gas with a very high btu content from natural gas liquids ("NGL") (which is commonly referred to as "wet gas"). In areas where the energy grade of the gas is 1,300-1,800 btu, the market prices realized by the sponsor can sometimes be 1.5-2.5 times the NYMEX spot price. The Andarko Basin and Hunton Play of Oklahoma are two examples of geographic areas where "realized" natural gas prices after factoring NGL revenues can significantly exceed prevailing market spot prices. While monitoring market movements in the gas arena is important, it is also important to consider the realized pricing potential that is affected by the richness of the gas and location premiums in some cases.
We hope you have found these points of light helpful. For additional educational opportunities with respect to oil and gas products, please make arrangements to attend the REISA 4-hour energy symposium that will be held at the national conference on October 7, 2012 at Caesar's Palace in Las Vegas. We hope to see you there.
|Current Market Developments|
While it is impossible to know for sure what natural gas prices will be in the future, the Energy Information Administration ("EIA") provides a summary of market supply and demand developments as well as a forecast of how those developments will affect prices over a 1-2 year period. The following information was derived from the EIA's Short-Term Outlook reported on July 10, 2012.
EIA projects the West Texas Intermediate (WTI) crude oil spot price to average about $88 per barrel over the second half of 2012 and the U.S. refiner acquisition cost (RAC) of crude oil to average $93 per barrel, both about $7 per barrel lower than last month's Outlook. EIA expects WTI and RAC crude oil prices to remain roughly at these second half levels in 2013. Beginning in this month's Outlook, EIA is also providing a forecast of Brent crude oil spot prices, which are expected to average $106 per barrel for 2012 and $98 per barrel in 2013. These price forecasts assume that world oil-consumption-weighted real gross domestic product (GDP) grows by 2.9 percent in both 2012 and 2013.
Natural gas working inventories ended June 2012 at an estimated 3.1 trillion cubic feet (Tcf), about 23 percent above the same time last year. EIA expects the Henry Hub natural gas spot price, which averaged $4.00 per million British thermal units (MMBtu) in 2011, to average $2.58 per MMBtu in 2012 and $3.22 per MMBtu in 2013.
As of July 31, 2012, the Henry Hub spot price for natural gas was $3.21 per mcf (with the natural gas market moving upward over the prior month from $2.50 per mcf reported at the end of June, 2012). According to the EIA's Natural Gas Storage Report released on July 26, 2012, natural gas inventories for the U.S. are 15.8% higher when compared with the 5-year average (with the over-supply situation changing for the better over the past five weeks, with June 25, 2012 inventories 27% over the five-year average).
In view of the significant increase in natural gas production reported by the EIA as a result of shale gas operations in the Appalachian Basin (Marcellus Shale) and in the Mid-Continent region of the U.S. (e.g., Haynesville Shale, Barnett Shale, Fayetteville Shale, and Woodford Shale Plays, which have caused natural gas production to increase from about 1 trillion cubic feet in 2006 to over 4 trillion cubic feet in 2010), natural gas prices could remain at current levels for an indefinite period (derived from the EIA's Annual Energy Outlook 2011). On this point, the EIA continues to believe that increased estimates for U.S. shale gas resources are expected to drive increased production, lower prices, and lower imports of natural gas for several years, and has suggested that such prices could remain below $5 per mmbtu until 2023 (derived from the EIA's 2012 Early Release Overview). With respect to oil, however, the EIA anticipates that market prices will continue to rise gradually as the world economy recovers and global demand grows more rapidly than liquids supplies from producers outside the Organization of Petroleum Exporting Countries (OPEC).
|Mick Due Diligence Opinions|
The following is a list of due diligence opinions our firm has or will have available on active sponsors and open oil and gas programs, with the order of the programs being random and not based upon merit:
Oil States Trading Sponsor Opinion
Legacy Income Fund I, Ltd. (Oil States Trading, Production Program)
ICON Oil & Gas Public Fund 2012 (Drilling)
Waveland Resource Partners II, L.P. (Leasebank Program)
Waveland Capital Group, LLC Sponsor Opinion
Noble Access Fund 13 Program (Royalty Program)
U.S. Energy Alpha 2012 (Drilling)
Catalyst Energy 2012 (Drilling)
Penneco Oil & Gas 2012 (Drilling)
Hard Rock Exploration 2012 (Drilling)
Atlas Resources Series 32-2012 (Drilling)
MDS Energy Sponsor Opinion
MDS 2012 Marcellus Shale Development, LP (Drilling)
Bradford Drilling Associates 32 (Drilling)
APX Drilling Partners 2012, LP (Drilling)
Aztec Oil & Gas XII Program (Drilling)
*Energy Hunter/Magnum Hunter Sponsor Opinion
*Miller Energy Resources Sponsor Opinion
Resources Royalty, LLC (Royalty Program)
Coachman Bakken Income Fund (Production/Drilling)
Coachman Bakken Drilling Fund II (Drilling)
Reef 2012-A Private Drilling fund (Drilling)
Franklin Square Energy & Power Fund (BDC)
Madison Capital Energy Income Fund III (Royalty Program)
Vista Drilling Program 2012 (Drilling)
**Gulf South Holdings
*Opinions that are work-in-process and not final
**Future engagement anticipated
On a final note, our firm welcomes opportunities for future due diligence including financial and legal analysis, on other oil and gas programs you may be considering at this time or in the future. Please let us know if there are oil and gas programs or sponsors not mentioned above that you would want us to review, and either approve or reject, on behalf of your firm. We have confirmed via our recent meeting with FINRA enforcement and member regulation executives in Washington, D.C. that: 1) Broker-Dealers and RIA's should dictate the firms they rely on as due diligence partners, NOT the sponsors, and 2) Mr. Ketchum's "push and pull" due diligence mandate dovetails perfectly with the approach our law firm principals have implemented for ten years-rejecting the energy, real estate, private equity and other offerings that have no meaningful opportunity to provide investors returns commensurate with the risk.
|About Our Law Firm
Mick & Associates, P.C., LLO
11422 Miracle Hills Drive
Omaha, Nebraska 68154
Mick & Associates, P.C., LLO
(402) 504-1710 (main)
(402) 504-3951 (fax)