Overleverage companies are working with their bankers to adjust their balance sheets and weather the storm. Capitalized groups are gearing up to acquire distressed assets in the marketplace. With pain comes opportunity for those who have the dry powder.
In this podcast, Reggie Robba takes us through his experience during the last down cycle as an O&G lender for BOKF, and gives us a sense of the conditions likely unfolding now between companies and their lenders. In the latter half of the podcast we explore how the release of assets from overleveraged upstream companies will create a feeding ground for investors with capital.
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Show Transcript
Adam Cohen: Hey Reggie. Thanks for joining us here today.
Richard Robba: Yeah, I appreciate it Adam. Thanks for thanks for having me on.
Adam Cohen: So I think let's start this pod cast off here with you giving us a little bit of background as far as where you're coming from and where you're at today.
Richard Robba: Sure. Yeah, so currently one of the partners and vice president Finance for a union Rock Partners where a direct investment platform in the oil and gas space Upstream space really focus mainly on non-controlling interest. So royalties minerals and then also from the leasehold side from a working interest side. Yeah previous to that was that be K Financial Bank of Oklahoma for some of the viewers might know them did energy lending their left the bank down in 2017 early 17 and and join copper trail that has now morphed into a we're at now which is a union Rock partners.
Adam Cohen: Great. So what brought you into the oil and gas space?
Richard Robba: Yeah, so I guess I'm second generation a little man gotta put a funny spin on it. My dad was a geologist. So I grew up around grew up around the industry. My first experience in oil gas. I was six months old and and it was my dad's biggest well and geologists are kind of like baseball players and pretty superstitious. So ever since then, I think I've been out to every single pad site or drill site because he's never had a dry hole when when I was there. So that's how I originally started around and then my mother's side of the family or is a ranchers in Kansas. And so we've always had production from a kind of a lan Lan holder side as well.
Adam Cohen: So what drove you into the financial aspect of this with your father having a background in geology and you spending a bunch of time in the field? You know, what drove you to more of the economic model side of things.
Richard Robba: I've always been been kind of a I guess a numbers guy in a way, you know, enjoy the details enjoyed understanding not only how things work. But but how they were financed and so came out of school really just focusing wanting to either be a part of an EMP or go the banking or out and ended up being going the bank and route for the first four or five years of my career at be okay? And I guess lucky or unlucky started with them in 13. So so 18 to good say 18 months of good oil price and then then it kind of all fell apart and late 14 through 15. But yeah, that's that was kind of how go all got started.
Adam Cohen: So what you know when you came in you were just entering the the tail end of the boom and and then, you know slid into that low commodity prices environment, you know, being new to the space. What what was your first reaction to to that transition?
Richard Robba: You know, the first reaction was well, of course, it's going to go back up and I think that's something that keeps happening continuously even now as we're sitting at I believe above twenty dollars, which is over the last couple weeks is impressive price, unfortunately, but yeah, I think I think the first reaction was definitely. Oh well, we'll be back at 80 90 hundred dollars in no time and Little did I know when we were sitting at 75 $65 that would go fine. The mid-20s. Not too far after that thought and I really remember one of them big mentors to me. He's a gentleman by the name of Mike Logan. We're all sitting in this meeting at at the bank and he goes guys it's not going to get better and it's time time for us to start focusing on our clients and trying to help and work. With them to weather the storm because this seems like it will be lower for longer and you know at that time he was in his 60s and had seen a few of these not only from the banking side, but also from being an industry.
Adam Cohen: So what what type of direction did Mike give you at that point and and the rest of the team as far as how to move forward from the banking perspective?
Richard Robba: Yeah, it was totally a work with your clients idea. You know, it's it wasn't a we're going to come and take all their assets and and and take over. You know, I think that's the last thing even now it is that that a bank wants to do is ever operate a set of assets for the most part. They don't have the experience or the wherewithal to do that. But no, but I mean Mike's main point was Find a way to work with our clients and I think that's why he was he was a pretty respected guy because not only had he had been through this from sitting on the other side of the table as a finance professional and EMP, but but also is the bank and so yeah, it was just work with your clients figure out a way to make it work, you know, luckily for me. I we had 60 or 70 clients and and I got to see 60 or 70 different case studies of what good good. Guys did what? Okay companies that and what bad companies that and and but yeah, I mean that was that was probably one of the best experiences that all end up ever have any in my career is just really really watching what all these different companies did and how they behaved and unfortunately for some that that ended up in bankruptcy and and four others that that ended up then prospered adding additional acreage acquiring some of the G will defunct companies but yeah, I mean, I think I guess to finish that thought. I think Mike's really main point was just work with the guys that want to work work with you and then for the clients that wanted to kind of stiff arm and deflect those were always the ones that ended up in more difficult conversations.
Adam Cohen: So when you go back to those case studies that you had during the last downturn the how much of it's a factor of where companies were at going into it versus how they reacted in responded after you know, the downturn occurred and they started, you know, re-evaluating internally, I guess how would you break, you know, the pre pre collapse post collapse? Ends and and the effects that it had on companies and their future coming out of it.
Richard Robba: Yeah, well, I think there was definitely a good good chunk of companies and that you know call it from o9 time frame up to 13 14. The balance sheets were just out of whack Capital was cheap. Shale. something and beginning of that Wells were really just becoming period And so a lot of groups were were pushing the envelope, so I guess to answer the first Part of that. I think most important part is to always have a good clean balance sheet, you know, if that means losing, you know 5 to 10% on from a optimal Capital stack standpoint, then I think it's well worth it all day to you know, stay in that one and a half, you know, the sub 2 times leverage standpoint, but I guess to fully answer your question there. So one it was the groups that were Were moderate to had at least a moderate balance sheet the the second group is groups that had an okay moderate balance sheet or a good balance sheet and then how they reacted and the groups that that would let's say we're kind of in that 2 and 1/2 times 2 3 times ratio. So fairly levered three times their annual cash flow or ibadah is normally how the bank As your it those were the groups that you really saw the difference and I think is where your question was going is they reacted quickly or at least the good ones. Did they react too quickly? They start paying down debt they able to get out ahead of some of the price collapse and sell some assets to pay down debt. Unfortunately made some top end cuts from a from a salary and G and a standpoint. It's so So they I guess the answer your question then yet. I mean, it's you that's where you I guess you really saw that dividing line was the groups that kind of if you will put put their head in the sand and going back to my earlier point, you know, we'll be back in Eighty ninety dollars in no time. That's where you really saw the difference.
Adam Cohen: Were there any case studies that you felt really surprised you and the way they came out of it, you know looking back and maybe their management structure or their position or their you know debt to equity ratio. Were there any that you know, just kind of blew you out of the water and and impressed you with their their ability to move out of adversity and into a strong position
Richard Robba: Oh, yeah. No, absolutely. I think luckily for us. The bank was always really good at finding good clients and good prospects and we had a conservative way of underwriting things. So yeah. No, they were definitely groups that came out ahead and really Thrive and although This price collapse of the last month due to covid and also due to the kind of Russia Saudis Feud is you know way more severe by at least 10 bucks. Then where we were in late 15 or early 16. I have no doubt that those companies are still still some of the better ones out there.
Adam Cohen: Yeah it and it's it's impressive how you know adversity pushes people and exposes the strong and you know, obviously does not favor the week. So what do you think right now are some of the things that that banks are going through when and looking at their their their companies that they're they're working with and that they financed and what What's the process at this point when when moving them forward?
Richard Robba: Yeah, I think I mean that's a lot of its price spent an hour talking about that but I guess high level, you know, really what they're looking at is we're in the midst or borrowing base Seasons. Typically every six months kind of starting late March and ending ending the end of this month in May. So we're in the middle of it right now or the banks are luckily. I'm no longer. But so really what that what they're looking at is they're running their reserves. They have a price deck. Unfortunately. I have a feeling that Engineers have had to run run the reserves a few times because of most price tax have sensitivity levels that if price moves down by 5 to 10% if I recall correctly. They have to re update the price deck but so they're looking at the reserves looking at first reserves, right? because that gives you a baseline what's my present value whether or not it's pv8 to PV 10 depending on the bank that gives you kind of your foundation of knowing what you can borrow against which is typically in the 50 to 60 and sometimes 70 percent range of that PDP value and then you'll pick up a little value for your pdmps and your pods and a market like this where when you look at your puds and they're probably uneconomical at At a sub $30 price deck then you're not going to be picking up any value there. So first we'll start with that. That's kind of the main main piece of the cake and then really it's going into their forecasts and to the company's forecasts and looking at their cash flows not only historically but going forward and so there's a lot of sensitivity analysis ran around the company's forecast. You know that I think we've seen or we've seen a tremendous amount of layoffs lately so that all gets kind of factored in and then really what you're looking in that is okay in 6 months when I'm back here in October November time frame. What is this look like, you know, can we can they maintain that volume base that we already have our do they need to start making payments to get get me where we'll be or get us where we will be. Come come October come the next borrowing base redetermination. And so again big Staples the present value of the company, but really what's even more oppressive. Right now is how much cash flow do they have and are they able to continue to maintain their their leverage ratio? So they're their debt to e but a ratio and if that looks like that is going to start to creep up or creep out of limits, which is used to be when I first started my career as a four times multiple now most banks are at a three and a half times leverage multiple. So they're looking at that and saying look, you know if they're sitting at three times and then we get talked oberer and okay now they're pushing up against three and a half times. If they don't start paying down debt, you're going to see the bank's kind of quote unquote going to their black box and say hey you guys need to make a 10 or 15 or 20 percent reduction and your volume base and you have six months to make those payments.
Adam Cohen: So how well do you companies typically respond to pressure expectations from the bank. Is it a pretty Mutual relationship where everybody wants to work together? Is there one side that has more pressure in the relationship or you know has to obviously the borrower has a lot more performance issues than the lender but
Richard Robba: Sure.
Adam Cohen: You know when it comes to that that relationship how much weight does the bank typically put against the borrower and and also, you know, does that change based on the nature of the the m&a market for for these companies to be able to liquidate and create some possible cash flow to repay their debts. Does that way into the equation?
Richard Robba: Yeah. Yeah, no, that's really does. I mean I think the way most credit Agreements are set up or kind of standard is basically if there's a bar and based deficiency. There's kind of three options. There's option number one, which is you provide us additional collateral. That's not in the borrowing base, which then pushes pushes that bar and base up most of the time that's most of the time a borrower usually has thrown all the collateral at the loan to get their original bar. Base the second option every what we call MRC payments which are monthly commitment reduction payments those allow for six months to six months to basically take that deficiency divided by 6 or traditionally by 6. If the forecast shows that you have more cash now than it might be, you know, a higher payment decreasing to a lower payment, which is really can turn into kind of a vicious cycle, especially if you end up Six months from now on is similar or lower price deck. And then the third option is that you just come up with the cash and you pay that deficiency right off, right? And so usually it's a combination of two and three of how the bank's get back to get back to whole but I mean, I guess from a pressure standpoint the idea is that hopefully your clients understand where they're at and it isn't the bank coming to them and saying look you're borrowing base is way out of whack. I mean the most clients I would assume all clients at this point should understand if you're going to even be in a loan situation or have a rbl. You should understand how that's at least within reason calculated. Right? And so you should have looked back at the beginning of March or end of March when things started to really fall off here and said look, I have a borrowing base coming up here in a month. What is this going to look like and you should be preparing to set yourself up and ideally it's the client coming to the bank and saying hey. We have an issue here. This is what we're going to try to do the solve it we're making G and a Cuts where we're not drilling these Wells rather drill, these Wells we're going to use this Capital pay down the line and that's the ideal world. But I mean, I guess the answer your questions you have everyone and then that whole spectrum and or at least that's what I saw was you had people that stuck their head in the sand and then you had groups that were outselling things. And so it's the Finish then on your ma comment. No, ideally you're able to meet those reductions by cash flow would be the ideal situation. I think. What happens I guess at the end of this say six months period is if you're not able to make a payment then what typically happens in this could have changed by now, but typically we would that's when you start to work out the loan and when it goes into work out the terms and ideas and the flexibility all changes it gets a lot harder to get good ideas done in because you don't have someone that you know your relationship Banker. That is those pushing for what's trying to do not only best for the bank first and foremost, but also what's best in the client and when it ends up and work out then, you know, it's just what's best for the bank. But so what I'm trying to say here is I think luckily groups that are going through these barring basis right now and that have that that borrowing base commitment reduction is they'll have six months to kind of figure out what they're going to do. And so the bank isn't going to push for you to sell something. As soon as you get into that but within 6 to 12 months, I do think you will start to see some distress sales that are being pushed by the Banks.
Adam Cohen: So that's really interesting because if you think about historically I mean the Shale Revolution is only you know, one one and a half decades old and it you know, the the decline curves on those Wells is significantly steeper than anything that we've seen historically from a production standpoint. So if these companies are withdrawing a lot of their Capital away from New exploration new development and funneling it towards repaying their debt. You know, how does that play out over time in a situation where commodity prices may stay...
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