Texas Oil & Gas DrillCo Development
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Tina Vital | Managing Director
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(917) 432-8474
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OVERVIEW
Client and operator have decided to start well development early – in June 2024. As a result, this Round of Financing will be open until mid-June 2024.
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Our client is seeking $25 million of equity (supplementing client equity investment of $55 million) for the follow-on development of seven development wells in the Culberson and Reeves Counties (Delaware Basin/Permian Basin), Texas.
- Client is forming a partnership with an operator and oilfield service firm to complete a 7-well development program; client will fund 90% of the capital and oilfield service firm partner will fund the remaining 10% on a pari-passu basis, collectively the “investors”; investment will follow a “DrillCo” structure (investors will fund 100% of the capital for new wells in return for 100% working interest in the wells until investors receive the greater of 135% of invested capital and an 16% IRR; once these return thresholds are achieved, the investor’s working interest will decrease to 5%)
- Follow-on investment structure allows investors to achieve equity-like returns, while holding priority at the top of the capital structure until investment thresholds are achieved; operator and oilfield service firm have successfully drilled and completed 64 wells together since 2013 (significantly delineating the acreage and mitigating geological risk; technical design and operating procedures have been optimized, mitigating execution risk)
- Up to ten wells will be drilled in two phases of five wells each; three-month evaluation period is planned after the first phase (allowing for measured investment after verification of operational results); as an additional benefit, this evaluation period allows for the reinvestment of early proceeds from the project ($75 million equity will be used to create over $100 million capital expenditure for drilling and completions)
- Significant infrastructure in-place – facilitates low transportation costs and supports delivery of production to end-markets
- Management team has deep upstream oil and gas exploration and production expertise in shale plays such as the Delaware Basin
DISCLOSURE
In compliance with the SEC’s Marketing Rule, this information is being provided by Castle Placement, LLC (“Agent”), acting as distributor for its investment manager client (“the Manager”) with respect to an investment vehicle of the Manager (“the Fund”). Agent is not an investor in the Fund or an advisory client of the Manager. Agent has a material financial incentive to introduce Manager and Fund to prospective investors and is compensated based on the amount of assets committed to the Fund, which may result in a material conflict of interest between Agent and potential investors. Agent has a written agreement with the Manager for compensation of certain services including a referral fee and success fees, as applicable. Agent may be reimbursed for certain out-of-pocket expenses as it incurs in connection with referring investors to the Fund. Compensation paid to the Agent are generally paid over a period of years.
SPECIFIC RISKS
- Operational Execution Risk, Risk of Capital Expenditures Over Budget: The cost to drill, complete and tie-in a well can materially impact the well economics. Cost overruns can occur due to operator error, technical difficulties, service cost inflation or geological issues. An operator’s ability to manage these variables is paramount to the success of the investment program.
- Geological Risk: Drilling a well to produce oil and gas includes risk that the targeted reservoir does not contain the expected amount of natural resource.
- Production Volumes: The quantity, quality and mix of hydrocarbons all impact well economics and thus investment returns. Initial production rates (the highest production rate a well reaches when it first produces hydrocarbons) (“IP rates”) are often used as a leading indicator in determining well performance. However, the rate at which production declines during the life of the well more materially impacts returns. Typically, unconventional wells have hyperbolic decline curves where production falls steeply after an initial peak in the first two years and then flattens out for the remaining life of the well. This low decline “tail” can last as long as 30 years. Additionally, the mix of hydrocarbons is important. Oil, Gas, and NGLs all sell at independent markets. Each well’s economics will vary based on the above factors as well as the price realizations these hydrocarbons receive in the market.
- Commodity Prices: The cash flows generated by a given level of production during the life of an investment fluctuate according to the commodity price environment. Exit valuations are also dependent on commodity price environment.
- Private securities are speculative, illiquid, and carry a high degree of risk – including the loss of the entire investment.