Reserve-Based Lending Versus Advance Royalty Company’s Advanced Royalty Program (ARP)
At Advance Royalty Company we offer a pioneering program we call the ARP program. First, we conduct a full analysis of the revenue you are receiving. From that analysis, we loan money against your future revenue for a specified term. The checks you were receiving for your royalties will now go into an escrow account for the duration of the term, not affecting the ownership of your mineral rights. Below, we’ll take a look at the difference between reserve-based lending and our advanced royalty payment plan (ARP) as these are both ways to leverage your current cash flows.
RESERVE-BASED LENDING (RBL)
RBLs have been a steadfast way of financing in the oil and gas industry for decades. They assign a value to an entity’s producing assets, and different categories of undeveloped assets, then loan on a fraction of that asset base. They secure these loans through a security interest in these oil and gas reserves. They can offer fairly attractive interest rates, however, market conditions and customer actions can have significant impacts on the value of an RBL. Reserve-based lending solutions are subject to reassessment periodically, where the amount of money that a bank is willing to lend is adjusted. If commodity prices fall, the value of the reserves falls accordingly, causing the RBL amount to also fall. In addition, if a customer pulls down the entire amount of their facility, it can be an event of reassessment, causing the interest rate to rise or the loan amount to fall. All of these factors create more uncertainty around RBLs, than one would consider at first glance.
As you can imagine, this process requires a lot of speculation. Some unknowns include:
- Commodity price volatility — as prices fall your reserve-based lending can be reassessed as the value of the reserves have fallen accordingly.
- Extraction expenditures. As mentioned above, some methods of extraction are much more involved, which raises the cost. Thus, the condition of the surrounding rock will be a big determining factor in your loan amount as well.
SOME BENEFITS OF RBL LOANS
- Relatively straight-forward lending options
- Flexible in drawdown and repayment profiles
- Suitable for pre-producing assets with development capex
SOME DISADVANTAGES OF RBL LOANS
- Shorter repayment periods than other funding options
- Refinancing risk
- Security required
- Conservative evaluation of your assets
- Fees plus interest
- A longer lending process with more paperwork and hoops to jump through
- Your loan can be reevaluated and restructured
- You’ll most likely need a personal guarantee
ADVANCE ROYALTY COMPANY’S ADVANCED ROYALTY PROGRAM (ARP)
The mission of Advance Royalty Company is to allow you to keep your mineral rights while obtaining money up-front in exchange for us keeping your royalty payments. We’ve developed our own Advanced Royalty Payment, or ARP, to help you with the money you need today. Here’s how it works:
- We take a look at your past and current royalty checks and conduct a full analysis that allows us to understand the different variables of your royalty check: volume, gross price, deductions, and taxes are some of the factors accounted for. These variables are the levers that determine your net revenue. Once we examine all of your royalty checks and collect additional information about the asset itself, we’ll make a no-obligation, lump-sum offer.
- Should you agree to our offer, you will receive that lump-sum within 10 days.
- Then we use your royalty checks to pay down your loan amounts for you. They are safely deposited into an escrow account. We do this for the agreed upon term. Then, once the term is up, you will receive your royalty checks once again.
If you are thinking that this sounds really simple — it is! Our ARP program allows you to keep your mineral rights and get a portion of your future earnings today in exchange for us collecting your future mineral rights royalty payments.
SOME BENEFITS OF APR
- Fast payment
- Straight-forward due diligence
- Funds received in whole, up front
- No credit check or a record of a loan on your credit report
- Keep future royalties outside of the agreed upon term
- No personal guarantee needed
- Based on cash flow
- Manages price risk
SOME DISADVANTAGES OF APR
- Cost of Capital can be higher than reserve-based lending if commodity prices rise
- Non-traditional structure
IS RESERVE-BASED LENDING HARDER TO OBTAIN?
Due to the very nature of how reserve-based lending (RBL) is calculated, Advance Royalty Company believes it is becoming harder to obtain these types of loans. Reserve-based lending is an asset-based loan that is based on the value of the borrower’s oil reserves. The borrower’s ability to repay the loan is based on their ability to sell the assets (in this case, oil or natural gas). If the price of oil goes down, this affects the borrower’s ability to repay that loan, which makes reserve-based lenders more hesitant to make loans.
Typically, reserve-based lending loans are cyclical in nature, meaning that as the borrower pays back part of their loan with the proceeds from their oil and natural gas sales, they borrow more — which is very much how a line of credit works. However, in calculating how much they are willing to lend, a very complicated formula with a lot of variables is used — including the amount of proven reserves (this is different from the amount of probable or possible reserves) and the future production rate of these reserves. Another very important factor that is taken into account when the lender is determining how much to lend is the calculated future sales price of a barrel of oil. As you could have guessed, this speculative formula is on the conservative side, meaning the lender is willing to lend even less money to the borrower.
As you can see, the lender is at risk due to the inherent volatile nature of the commodity market of oil. The lender then mitigates this risk by lending less money. This means that many oil and gas companies experience a liquidity crisis. This leads them to drill less, which makes their oil reserves worth even less in the eyes of the reserved-based lenders. This vicious cycle continues until the company has to fold. Throw in the fact that reserved-based lenders have the discretion to change their formulas at any time and to change the commodity price of oil, the borrower is at a loss.
Reserve-based lending will be on the decline as lenders pull back from the oil and gas industry. This leads the oil and gas companies to search for alternative sources of lending, which is where Advance Royalty Company comes in. In our lending system, we provide cash upfront in exchange for your royalty payments from your mineral rights. This will allow you the liquidity you need to keep operating, drilling, and producing so your company can stay viable.
WHERE ADVANCE ROYALTY COMPANY STANDS
Advance Royalty Company believes our method of allowing you greater access to more of your wealth that is tied up in oil and gas reserves is a win-win for both parties. You will be able to have more of your money today (and with the time value of money, who doesn’t want that?). You will have less hassle to deal with. Our terms are more flexible to suit your particular needs and easy to understand. Approval time is fast, and ARP lending is cheaper than private equity financing or reserve-based lending.
Advance Royalty Company believes that by accessing the value of your mineral rights today through our APR program, you will be saving money and using the money you receive today for future investment opportunities. Contact us today to get started!