Finance 3632 Test 4

EBITDAX

Earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses (......) is an indicator of a company's financial performance calculated as: = Revenue - Expenses (excluding tax, interest, depreciation, depletion, amortization and exploration expenses) used when reporting earnings for oil and mineral exploration companies

price deck

Frequent updates of Oil & Gas bank

advance rates

Maximum percentage of the value of a collateral that a lender is willing to extend for a loan. Common range from 70-85% of eligible AR.

compensating deposit balances

Required deposits a customer must keep with a lender as a condition for getting a loan

LBOs (Leveraged Buyouts)

contractual agreements in which a company or small group of individual investors purchases a business or buys a portion of a business firm's assets with heavy use of debt and relatively little equity capital and relies on increased earnings after the business is taken over to retire the debt

Reserve Based Loans (RBLs)

Typically structured as 1) revolving credit commitments, 2) terms generally ranging from three to seven years, 3) advances controlled by a reserve borrowing base. In the context of oil and gas is a commonly used technique for financing assets which are already in production or where production is expected to commence shortly. (60% of economic life of proved, 75% economic life for secured)

statement of cash flows

a financial report often constructed by credit analysts or by borrowing customers that shows a prospective borrower's sources of cash flowing in flowing out and the actual or protected net cash flow available to repay a loan or other obligation

revolving line of credit

a financing arrangement that allows a business customer to borrow up to a specified limit, repay all or a portion of the borrowing, and re-borrow as necessary until the credit line matures

syndicated loan

a loan or line of credit extended to a business firm by a group of lenders in order to reduce the credit risk exposure to any single lending institution

customer profitability analysis

a method for evaluating a customer's loan request that takes into account all revenues and expenses associated with serving that particular costumer and calculates an expected net return over all costs incurred from serving the customer

price leadership

a method for setting loan rates that looks to leading lending institutions to set the base loan rate. starts with a base rate such as the bank's prime rate and adds a markup for default and term risk

cash flows from operations

amount of cash generated from normal business operations

prime rate

an administered interest rate loans quoted by lending banks and usually set by a vote of each banks board of directors; the interest rate that the public usually thinks is the best (lowest) rate for loans and that a bank quotes to its biggest and best customers

mineral interest

an interest of any kind in coal, O&G, and other minerals, can be through direct ownership or by lease

independents

any upstream exploration and production company that is not integrated and not involved in downstream activities like refining and marketing

secondary

assets pledged as collateral

borrowing base

- a collateral base agreed to by the borrower and lender that is used to limit the amount of funds the lender advances to borrower; specifies the max amount that can be borrowed in terms of collateral type, eligibility, and advance rates - the amount of money a lender will loan a company based on the value of the collateral the company pledges; usually determined by a method called margining, in which the lender determines a discount factor that is multiplied by the value of the collateral

global cash flow

- a comprehensive evaluation of borrower capacity to perform on a loan that considers the borrower's related debt at other financial institutions. - How well does ... cover all debt - How does each project or subsidiary cover its direct debt

working interest

- a percentage of ownership in an O&G property or lease that grants its owner the right to explore and produce O&G from a tract property - The ... owner is also liable for all of the costs of drilling, development and operations. - refer to a form of investment in oil and gas drilling operations in which the investor is directly liable for a portion of the ongoing costs associated with exploration, drilling and production. owners also fully participate in the profits of any successful wells

royalty interest

- a property interest in O&G minerals, whose owner is entitled to a share of production when there is production - free of the costs of production. - refers to ownership of a portion of the resource or revenue that is produced, a company or person that owns this does not bear any of the costs of the operations needed to produce the resource, yet the person or company still owns a portion of resource of revenue produced

LIBOR

- a rate on short term eurodollars deposits which is used as common basis for quoting loan rates to corporation and other large borrowers - a benchmark rate that some of the world's leading banks charge each other for short-term loans

direct method

- also called the income statement method; takes various cash activities, receipts from customers, payments to suppliers, cash paid to workers and combines them to determine cash flow from operations; top-down - a method of creating a statement of cash flows during a given reporting period; the method uses actual cash flow information from the company's operations segment, instead of using accrual account values

indirect method

- also called the reconciliation method; net income is adjusted by non-cash activities to derive the change in cash; the easiest method to prepare and understand, but the most useless; bottom-up - a method for creating a statement of cash flows a company may use during any given reporting period; uses accrual accounting information to present the cash flows from the operations section of the cash flow statement

index

- an indicator or measure of something, and in finance, it typically refers to a statistical measure of change in a securities market - reflects the interest cost of borrowing in the money market for your institution

mineral interest

- an interest of any kind in coal, O&G, and other minerals. Can be through direct ownership or by lease. - a landowners right to receive a portion of the profits of any minerals that are extracted from the land; apply to all types of resources, such as oil and gas, ores and metals or other raw minerals

cash conversion cycle

- attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers - metric that looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its bills without incurring penalties

economic life

- is the expected period of time during which an asset is useful to the average owner. - A reasonable repayment period for a RBL: is within 60% ... of the proved reserves - and within 75% of the ... for total secured debt in the bank's base scenario.

UCA cash flow model

- one method used to determine the ability of a company to pay a loan. - uses a version of the direct method with a detailed breakout of changes effecting cash. - Has become a standard for the lending industry. - The structure makes it easy to determine key variables

base case

- part of the underwriting process. Banks use repayment tests to determine whether future cash flow sufficient to repay the existing borrowing base commitment within a reasonable time. - ... should use prevailing market prices and supportable expenses

asset-based lending

- specialized loan product that provides fully collateralized credit facilities to borrowers that may have high leverage, erratic earnings, or marginal cash flows - business loan secured by collateral (assets). The loan, or line of credit, is secured by inventory, accounts receivable and/or other balance-sheet assets.

sensitivity case

- subjects the O&G reserves to adverse external factors to determine the vulnerability of the borrower's repayment capacity to adverse economic conditions. - When determining total debt repayment capacity, banks should use this analysis to estimate the impact that sustained changes in commodity prices, E&P costs, and other market conditions would have on a company's repayment ability

spread

- the difference between the bid and the ask price of a security or asset - includes both the default and term risks - markup for risk and profit

overriding royalty interest

A working interest in the production of O&G rather than a property interest in the minerals in the ground.

self-liquidating loans

Business loans, usually to support the purchase of inventories, in which the credit is gradually repaid by the borrowing customer as inventory is sold

project loans

credit designed to finance the construction of fixed assets associated with a particular investment project that is expected to generate a flow of revenue in future periods sufficient to repay the loan and turn a profit

term loans

credit extended for longer than one year and designed to fund longer-term business investments, such as the purchase of equipment or the construction of new facilities. Secured by fixes assets

contingent liabilities

debt obligations that will not come due unless certain events occur, such as borrower default or the exercise of product warranties (will not show up on the balance sheet)

proved

estimated quantities that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs using existing economic and operating conditions

unproved

estimates of crude oil, natural gas, and natural gas liquids that are also based on geological and engineering data but do not indicate a high degree of certainty

Proved Developed Producing (PDP)

expected to be recovered from completion intervals that are open and producing; the well is completed

upstream

exploration and production

cost-plus loan pricing

figuring the rate of interest on a loan by adding together all interest and non interest cost associated with making the loan plus margins for profit and risks

midstream

gathering, processing and transportation of oil or natural gas

below-prime pricing

interest rates on loans set below the prevailing prime rate, usually based on the level of key money market interest rates (such as the current market rate on Federal funds or Eurodollar deposits)

majors

international integrated oil and gas companies involved in almost every aspect of the O&G business; most are also engaged in the manufacture and sale of petrochemicals; shell, chevron, exxon

CERCLA

law that makes current and past owners of contaminated property, current and past owners and prior operators of businesses located on contaminated property and those who transport hazardous substances potentially liable

working capital loans

loans that provide businesses with short-term credit lasting from a few days to one year, and that are often used to fund the purchase of inventories in order to put goods on shelves or to purchase raw materials

primary

operating cash flows

tertiary

other borrower assets not already pledged as collateral and assets of the guarantors

reserves

quantities of oil or gas that are expected to be commercially recoverable from known accumulations from a given date forward

redetermination

reassessment of the borrowing base

coverage

refers to the protection afforded to creditors of a firm based on the amount of the firm's earnings

downstream

refining, marketing, and distribution

factoring

sale of the shorter-term assets of a business firm that are expected to roll over into cash In the near term, such as accounts receivable and inventory, in order to raise more working capital. When the title to accounts receivables pledged in an asset based loan is passed to the lender and the lender takes some of the responsibility for collecting the accounts receivables

interim construction loan

secured short-term lending to support the construction of homes. apartments, office building, shopping centers, and other permanent structures

oilfield service companies

supporting or servicing the above sectors (upstream, downstream, midstream)

working capital

the current assets of a business firm (consisting principally of cash, accounts receivable, inventory, and other assets normally expected to roll over into cash within a year); some authorities define it as equal to current assets minus current liabilities

Exploration and Production (E&P)

the upstream of oil and gas; focus on finding, augmenting, producing, and merchandising different types of oil and gas