Reserve-Based Lending Versus ARC Rock Capital’s Advanced Royalty Program (ARP)
In today’s world, your choices can be overwhelming. Even in the simple things in life, like ordering at a fast food restaurant, more than likely you have over 100 items to choose from. And at the end of the day on a Friday, who wants to make just one more decision?
At Advance Royalty Company, our mission is to give you the clear choice for royalties for your mineral rights. We offer a pioneering program we call the ARP program. First, we conduct a full analysis of the royalties you are receiving now. Then, we make an offer for our ARP program, where you will receive your payment within 10 days. The checks you were receiving for your royalties will now go into an escrow account for the duration of your time with us in our advanced royalty payments, not affecting the ownership of your mineral rights in the least. Below, we’ll take a look at the difference between reserve-based lending and our advanced royalty payment plan. Contact us to learn more today!
RESERVE-BASED LENDING (RBL)
First off, let’s define reserve-based lending. Reserve-based lending is a type of asset-based lending (ABL) that is frequently used by the oil and gas industry. The asset, in this case, is oil and gas reserves, such as a reservoir that has been found and is being drilled. However, the oil and gas can also just be in the ground as well. When you take out a reserve-based loan, you are borrowing against the value of your oil and gas assets in the ground. So,these loans are tangible products, even if you can’t see them. However, in RBL loans, the amount of your assets (oil and gas reserves) that you have put up as collateral is periodically evaluated, which can leave you with significantly less money than before. The loan is then repaid when the oil and gas is sold, or it can be repaid as you see fit otherwise.
As you can imagine, this process requires a lot of speculation. Some unknowns include:
- The amount of oil and gas in the ground. This is unknown every time an oil well is drilled. You could have a lot of oil or a little bit of oil. Or, you could have a lot of oil, but it’s locked up in shale, for example. This will require hydraulic fracturing, directional drilling, or some other advanced extraction technique to unleash. These extraction methods are more expensive than other ways, so it may be something banks want to shy away from, since you will be receiving less revenue stream.
- Price of oil and gas. As a global commodity, the price of a barrel of oil is tied to the world market. If there is a political crisis in a big oil-producing state, the price of oil can rise dramatically. Thus, predicting the price of oil is another variable that is factored into your RBL loan.
- 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 draw down 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
- Longer lending process with more paperwork and hoops to jump through
- Your loan can be reevaluated and restructured every six months or so at the will of the lender
- You’ll most likely need a personal guarantee
ADVANCE ROYALTY COMPANY’S ADVANCED ROYALTY PROGRAM (ARP)
Oil and gas royalties are the monies received by those who either are the landowners that the drillers are operating on, are those who own the mineral rights, or both. This money is usually a share of the gross profit of the oil and gas that is removed on the property. These are generally paid out monthly since the amount of oil extracted varies per month. If it weren’t for oil and gas royalties, many landowners and mineral rights owners would not allow drilling. It’s a catch-22 since your oil and natural gas that is in the ground is worthless unless it’s extracted by an oil and gas service company and sold on the open market. But what if you need a large sum or money now for various things, rather than the money being divided up every month? That’s where Advance Royalty Company comes in.
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 ARC Rock Capital Advanced Royalty Program, 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. This allows us to see the average amount you get per month. Once we examine all of your royalty checks and collect additional information about the asset itself, we’ll make a no-obligation, lum-sum offer.
- If this is agreed upon, 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 never sell them 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
- Monies received up front
- No credit check or a record of a loan on your credit report
- Keep your mineral rights
- Keep future royalties outside of the agreed upon term
- No personal guarantee needed
- Based on cash flow
SOME DISADVANTAGES OF APR
- Fees are higher than a bank due to the inherent risk since the oil and gas market can be volatile
- Loan structure is different than people are used to
IS RESERVE-BASED LENDING HARDER TO OBTAIN?
Due to the very nature of how reserved-based lending (RBL) is calculated, Advance Royalty Company believes it is becoming harder to obtain these types of loans. RBS 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 off 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 RBL lenders more hesitant to make loans.
Typically, RBL 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 can guess, this speculative formula is on the conservative side, meaning even less money the lender is willing to lend to the borrower.
As you can see, the lender is at risk due to the inherent volatile nature of the commodity market of oil, who 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, and 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, and the borrower is at a loss.
In conclusion, RBL lending will be on the decline as lenders pull back from the oil and gas companies. 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 up front 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 in the ground 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?) to do with as you want. 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 APR lending is cheaper than private equity 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!