Food Logistics Loan Program Summary

The U.S. federal government Food Logistics Loan Program is a temporary program to bring loan capital to companies that process, manufacture, transport, or add other value to the nation’s food supply. The program is available to for-profit businesses, co-ops, tribal organizations, and non-profits that add value to the food supply in the United States. It doesn’t matter where in the U.S. you are based and is available to both rural and urban organizations.

The Food logistics loan program is designed to provide inexpensive capital via long-term loans of up to $45 million to businesses that add value to any food products between the farmer, fisherman, or rancher and the commercial end user.

Examples of qualifying organizations include:

• Meat processing plants that take animals from farmers, and ranchers and process them for further use or sale.
• Feedlots and auction barns that finish preparing livestock for sale.
• Businesses that take raw ingredients and mix them to make processed food ingredients that can be cooked, and used in other food products at either the commercial or consumer level.
• Fish or seafood processing plants that take a caught fish and clean, filet, and flash freeze it for further processing or end use.
• A milk or milk byproducts plant that takes raw milk, pasteurizes, and separates the components for use in a variety of milk products.
• Cooperatives and aggregators that store raw food products such as grain from multiple farmers for sale or transport to other food processors. Most farmer’s cooperatives qualify.
• A wholesale distributor that buys or takes consignment food and food products and then sell them to other commercial customers for retail sale or other uses. A fruit and vegetable produce distributor is a good example of this type of wholesaler.
• Companies that transport food and food products from the farmer to the processor or end commercial user or retail store. Refrigerated trucking companies are good examples.

There are hundreds of other types of organizations that qualify for the food logistics loan program.

Examples of organizations that do not qualify:

• The farmer who grows food and the fisherman that catches seafood. There are other long-standing programs that assist these entrepreneurs.
• Retailers who sell the food product directly to consumers.
• Businesses or organizations that manufacture, wholesale, or add value to alcoholic beverages including wine, distilled spirits, and beer.
• Businesses that manufacture or sell packaging for partially or fully completed food products.

Food Logistics Food Program Use of Loan Proceeds

• Expand physical facility to increase food processing abilities.
• Acquire other businesses that compliment your existing company.
• Increase inventory to insure an adequate supply of raw materials for production and finished goods for sale.
• Provide permanent working capital to begin selling to large national retailers. Financing accounts receivable and paying retailer slotting fees qualify.
• Capital to provide greater safety cushion, post-pandemic, or because inflationary pressure is increasing in the food marketplace.
• Buy a piece or line of equipment that will speed up or make a process within a food facility more efficient.
• Buy refrigerated trailers or trucks to transport partially or finished food to the next step in the supply chain.

Next Steps

As one of the nation’s leading finance companies for food and beverage products, Business Finance Solutions (BFS) is highly involved in the Food Logistics Finance Program. We have originated hundreds of loans for the food and frozen fish industry.

For more information, call Sam Thacker @ 512.990.8756, email: sam@bfs-usa.com.

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Franchises are an excellent way to own a business without having to build the brand from the ground up. Because many franchises are well-proven business models, they tend to have lower risk associated with failure because of undercapitalization and brand awareness.

One of the requirements of being a franchisor is to provide initial and ongoing franchise training to management. When you buy a franchise and attend their management training, you are better equipped to avoid mistakes that other franchises have made.

Across the United States, there are thousands of franchise opportunities. Some are excellent ways to own a profitable business with significant upside potential to build a strong business. Some franchisors provide extremely good training and ongoing support while others take a less structured approach. If you do your homework well and pick a franchise that balances your needs, you can establish a profitable business quickly with minimal stress.

Prioritizing Franchise Needs

For a first-time owner of a franchise, an important consideration may be the amount of support given to you by the franchisor. Support includes training of your management and operational teams. Equally important is how well other franchises have done financially and if their actual historical records support their initial financial projections made before they bought into the franchise.

A really good franchisor will spend a great deal of time to understand your overall business and lifestyle goals so that you are a happy owner with minimal risk. Great franchisors understand the importance of having successful franchise owners.

Depending on the type of franchise you may be considering, added support might involve periodic safety and sanitation training for your operational staff and helping you improve the profitability of your business.

Existing Franchise Owners Seeking Expansion Capital

Most franchise owners believe you should own multiple locations of the same franchise brand. There are many who also believe you should cross into other franchise opportunities. For example, a popular franchise is Little Caesar’s Pizza. An owner of 4-5 locations of one fast food franchise featuring pizza might also own a franchise brand focused on hamburgers, comfort food, or some other non-competitive food concept in a proven, popular model. A good example might be Subway. Using this model for growth allows for predictable profitable growth using the same principals and repetitive models.

if your company currently owns one or more franchise locations under the same franchise banner adding additional stores requires minimal down payment capital and is relatively easy to finance.

If you’re an existing franchise with several locations and wish to buy into a different franchise banner it is also relatively easy to assist you, as long as it is the same holding company for both chains. For example, let’s say you currently own five Little Caesars pizza locations and wish to put in eight Subway locations, financing is both available and competitively priced.

Franchise Owner Concerns

The key to having a good experience and establishing a strong healthy business is picking the right franchising group and nearly as important, picking the right location.

Most franchises are consumer-focused businesses, so you want to build out your locations where consumers can find you easily and where the demographics make sense. The real estate saying, “location, location, location” is one of the most important considerations you can make as a franchise owner.

Some franchises have less skilled staff to help you find the right locations for your business. Great franchisors do have strong site selection departments.

Many franchise owners tend to be entrepreneurial in spirit. Some have a difficult time balancing their independent personality with a strong franchisor’s policies, procedures, and buying programs. If you believe that your philosophies about running a business don’t match those of the franchisor’s, you might not be a good fit for that franchise.

How Franchisors Get Paid

Franchisors are paid on an ongoing basis a royalty fee based on your franchise gross sales. Some franchises don’t have enough gross margin for the owner to make a reasonable profit after they have paid their ongoing franchise fees.

Great franchise programs provide deep discounts on inventory and various services that a franchise owner needs to use. Often, these discounts help make up some of the prophets given away to the franchisor. Perhaps more importantly, the franchise brand should be strong enough to help attract new business to a franchise location which translates to increased gross profits.

Franchise Due Diligence

As you do your due diligence on the franchise program, it’s important to make a list of all the potential negatives you might experience and think through ways you can use to mitigate your risks.

As with any other business venture, if you start your process in considering a franchise as a way to build personal wealth, weigh the risks and rewards, and have an exit strategy before you begin, you have a high chance of success.

Business Finance Solutions Can Help You Finance Your Franchise!

Business Finance Solutions can help franchisees obtain capital to buy and grow their enterprise using market competitive loans. To learn more about franchise financing, contact Lori Wickard (512) 961-4886 or by email lori@bfs-usa.com

Webinar Series

Business Finance Solutions offers a monthly webinar series to share important business information from elite experts in the fields of finance, manufacturing, technology, and sales and marketing. Join us.

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Since 1994, Business Finance Solutions has been financing or providing consulting services to specialty food and beverage manufacturers in Texas, Louisiana, Missouri, New Jersey, New York, and Alaska.

Mexican Food Product Company – Texas

Products: corn chips, frozen enchiladas, frozen tamales.

Distribution: Walmart, regional grocery stores, restaurants.

Our customer shipped four large freezer trucks a week to Walmart.

HEB, A San Antonio based grocery store chain was also a large customer. We provided growth capital and equipment finance for many years until the business sold.

Part of the challenge our client had to overcome was the cost of new store slotting fees. Another challenge was delivering frozen enchiladas in the kind of sealed packaging Walmart wanted. Our financing allowed the manufacturer to have the right kind of equipment and the ability to produce the quantities customers wanted.

 

Sangria Wine Producer – New Jersey, New York

Products: red and white sangria wine.

Distribution: NE United States.

Our client spent two years creating a low alcoholic content sangria wine.

He produces two flavors, white sangria wine, and red sangria wine.

His recipes include fresh fruit juices sourced from the US and South America. Production is complicated because the product requires pasteurization.

We provided working capital for about five years.

 

Fish Processing – Alaska

Products: fresh salmon, Pacific cod, other seasonal fish. Gourmet smoked, canned salmon.

Distribution: fresh fish through fish distributors throughout the US. Smoked fish products direct to consumer and Alaskan visitors.

Our customer was a seasonal Alaska-based fish processor. They owned a fish processing ship that anchored 15 miles off-shore so fishermen could easily unload their catch close to the fishing grounds.

They owned an onshore facility for storing fish that as filleted, frozen, and packaged in ten-pound boxes. The shipped their inventory in freezer containers to the lower 48 states and the far east.

Our client also smoked and canned small batches of tasty salmon every year which they sold to Alaska tourists and in some stores in the Pacific Northwest.

We financed working capital for several years and approximately 1/2 of the floating fish processing vessel. Read more about our fish finance program.

Italian Food – Texas

Products: gourmet pasta sauces, Tex-Italian flavored salsa.

Distribution: Nationwide through grocers.

 Our customer makes gourmet pasta sauces and “Tex-Italian” salsa. They have won numerous awards for their products that primarily use Italian sourced tomatoes, spices and herbs.

We started financing this company when it was very small and changed financing methods several times as the company grew.

When the owner was ready to sell his company, we helped him sell it to a much larger specialty food manufacturer.

Fresh Refrigerated Salsa – Texas

Products: fresh salsa and pico de gallo.

Distribution: Central Texas – regional grocers.

HEB, A highly respected regional grocery store chain liked the freshness of our client’s products and started stocking the product in over 300 stores.

Sales skyrocketed because consumers liked the fresh taste of the uncooked ingredients. We provided some equipment finance and working capital to help the company grow.

Today, the company private labels its product for a nationwide natural grocery store chain.

Cuban Sandwiches – New York

Products: gourmet Cuban sandwiches.

Distribution: Nationwide through Costco and regional grocery store chains.

Our customer was able to get their product featured first in regional Costco stores, then nationwide.

The sandwiches were sold frozen but had a great taste when they were reheated. They captured the flavor of the old style Cuban shaved beef and pepper sandwich.

Business Finance Solutions provided working capital for growth in Costco and other retailers.

About the author

Lori Wickard is Business Finance Solution’s food and beverage finance expert.

Lori has 30+ years of business experience managing and running various enterprises. Lori also owned and operated her own personal chef service. Working with food manufacturers and commercial kitchens is a passion.

Lori’s primary role is working with clients to compile the numerous loan package documents necessary to evaluate and submit to a lender.

 

If your company needs a business loan call Lori!

 512.961.4886 o | 512.910.9805 c

lori@bfs-usa.com

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The history and folklore of American oil and gas production is closely related to the history of Midland-Odessa. From the first traditional oil wells drilled in the Permian Basin in the 1920, to the wildcat era of the 1940-50’s, to the frac boom of the late 1990’s, Midland-Odessa has been a major protagonist in the story of American oil production.

Texas based, Business Finance Solutions has been financing oil and gas service companies, oil and gas production companies, offshore oil and gas companies, materials companies, and oil and gas production companies since 1994. Our finance experts have worked with oil and gas companies in Houston, Dallas, Lafayette, Lake Charles, Oklahoma, and Midland-Odessa, as well as other major oil and gas producing areas.

We have helped hundreds of small and lower middle-market companies with equity, senior debt, mezzanine debt, and combinations of debt and equity. We are good at what we do and specialize in helping hard to finance companies.

The Midland Texas Skyline is an economic oasis in the middle of West Texas.

The Permian Basin, and its two largest cities, Midland (Midland County) and Odessa (Ector County) are producing more crude oil for the United States than any other part of the country. The map below shows the enormity of the oil play.

The entire basin is 250 miles wide by 300 miles tall. The Permian Basin has produced over 30 billion barrels of oil in its 100-year life and 75 trillion cubic feet of gas. It is currently the second largest oilfield in the world. Some experts believe the Permian Basin has over 150 billion barrels of recoverable reserve left.

Midland and Odessa are each about the same size. Both have populations of about 180,000 and each is headquarters to many small and mid-sized companies that provide services to the oil and gas industry.

At any given intersection in either Midland or Odessa, you can see a half dozen pneumatic trucks that haul fracking sand or provide pressure pumping services waiting on lights to change. Pipe yards and material suppliers line major highways and industrial complexes.

Source: Natural Gas Intelligence. Map of Texas and New Mexico Counties of the Permian Basin. Midland-Odessa is the combined two cities where most of the activity originates.

According to the Baker Hughes Rig Report, as of August 25, 2017, there were 920 oil and gas drilling rigs operating in the U.S. Approximately 1/3 of them were drilling in the Permian Basin. The U.S. government Energy Industry Administration which keeps track of production statistics indicates that as of August 2017, the Midland-Odessa region is producing approximately 2,600,000 barrels of oil per day. The average well produces 595 barrels per day. The Permian region produces a fair amount of natural gas as well.

Types of Oil and Gas Companies we Finance

This is a partial list of the types of companies we work with on a daily basis in the Midland-Odessa area.

List of Texas Counties in the Permian Basin

New Mexico Counties in the Permian Basin

There are three large New Mexican counties that are part of the Permian Basin. They are Chavez, Eddy, and Lea.

If you have an oil and gas service or exploration company that needs growth capital, or funds to acquire another company, or expand a product line, call us at 512-990-8756.  We speak your language!

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Access to capital for small businesses remains tight in 2017. Working capital is the primary external financing need for small businesses.

Every quarter since 2012, the Pepperdine University School of Business and Management releases a compiled survey of businesses demonstrating the demand for capital for small and middle-market businesses. Access to capital for small businesses has remained lower than demand in every quarter since 2012.

The most recent survey which covered the first quarter of 2017 shows some troubling trends for small and lower market businesses. The survey shows the struggles with capital of small businesses with revenues of less than $5 million and lower middle-market businesses with revenues of $5 million and $100 million.

The survey also indicates respondents estimates of needing external financing in the six-months after the quarter. It is fair to estimate the trends the study show will continue through 2017.

The most recent Pepperdine survey shows there was a 2.5% different between private capital access (PCA) and private capital demand (PCD). Since its first report was published there have been significant quarterly spikes in the difference between demand for private capital and access to private capital. In all quarters, there has been a significant difference between small business access to capital and lower middle-market capital demand and access. Businesses in the lower middle-market have had much more access to capital than those with annual revenues below $5 million. This could partly be a result of having audited financial statements and strong business processes in place.

The current survey shows lower middle-market businesses have greater access to capital than their demand. It also shows among businesses with less than $5 million in revenues, there is a 5% gap between demand and access.

Demand For Capital By Need

This list for the first quarter of 2017 by the Pepperdine study is ranked by type of capital need reported by both small and lower middle-market businesses:
1. Working capital fluctuations (64.7%)
2. Planned growth, expansion, and acquisitions (not yet realized) (64.2%)
3. Growth due to increased demand (already realized) (58.5)
4. Finance worsening operating conditions (34%)
5. Refinance existing loans or equity (32.7%)
6. Withdraw wealth for owners (22.9%)

In another chart, the Pepperdine study normalizes the data. Working capital and growth capital are at the tops of most business’ demand list.

Difficulty Raising Equity and Debt Financing

Although both small businesses and lower middle-market businesses reported considerable difficulty raising capital, it is clear from looking at the survey results that the resources found in larger businesses made the most difference in their success in raising capital.

How Business Finance Solutions Can Help!

Business Finance Solutions is highly focused on helping small and lower middle-market businesses with debt and equity financing solutions tailored to needs.

Since 1994, our professionals have helped hundreds of companies grow profitably using bank financing, alternative financing, private debt, and private equity. Funds advanced on behalf of our clients have been more than $400 million.

Business Finance Solutions focuses on small businesses and lower middle-market businesses up to about $50 million. Last year we successfully assisted an oil and gas service and construction business with over $100 million in revenues.

Small and lower middle market companies need a team of trusted advisers whether they are in-house or consultants from outside the business.

Our strategy is to get to know your business needs at the deepest possible level so we may match your private debt and equity needs with the least expensive provider. While the cost of capital is critical, we also believe we have a duty to match your company’s personality to any lender or investor we may propose.

Our specialties:
• Working capital needs
• Growth capital
• Capital to acquire a business (M&A) or to expand
• Assisting companies turn-around from being unprofitable to profitable.
• Equipment Finance
• Seasonal and cyclical company financing
• Debtor in possession financing (DIP)

One of our debt and equity experts is standing by to answer any questions you may have. Please feel free to call us at 512.990.8756 or fill out our convenient reply form.

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Audited financial statements provide shareholders, investors and lenders of lower middle market and middle market companies the highest assurances of the financial strength of a business. They cost more than any other type of financial statement, but they often provide greater access to capital at a reduced cost, in most cases offsetting the cost of the annual statement preparation.

There are four kinds of financial statements.

1. Internally prepared
2. CPA compilation,
3. Reviewed, and
4. Audited.

Each type is considered by the accounting and finance industry as being more reliable than the one before.

Audited Financial Statements Carry Higher Reliability

Audited financial statements carry the highest level of reliability according to the accounting industry. Many business owners wonder when they should spend the time and expense for an audited set of financials. Audited financial statements are very thorough examinations of your company and its financial processes. When an auditor gives an unqualified opinion as to the financial health of your company it has many practical implications.

How Much Can A Company Expect To Spend on Audited Financial Statements?

Depending on the size and complexity of your company, the costs of having audited financial statements ranging from $20,000 to $50,000 annually. It’s a serious commitment. For a very small company the cost could be below $10,000.

The most important consideration when deciding on whether to engage an accounting firm for an audit depends on several issues.

Provide Assurance to Shareholders

If your company has more than a few shareholders, getting audited financial statements is potentially worthwhile. The higher the number of shareholders a company has the greater the chance that one of them may bring litigation because of your business practices. Audited financial statements may help reduce the cost of litigation and may even prevent it.

Sophisticated shareholders will appreciate receiving their copy of the annual audit and will be more inclined to invest additional capital should you need it.

Lower Borrowing Costs

Banks and institutional investors will often make more capital available to businesses that take the time to provide audited financial statements. Decisions can be made quicker and the cost of capital may be less too.

It is normal for an institutional private equity fund and some banks to require audited financial statements in the second year of a relationship. Asset-based lenders often also require audited financial statements.

Audited Financial Statements Are Necessary Before A Public Offering

Any company planning on having an initial public offering is required to have three years of audited financial statements before they are permitted to sell stock in the public markets.

In many cases, a business that is planning an IPO at the beginning will spend the money so they have audited financial statements for every year of business.

Selling Your Business Within The Next Three to Five Years

If you believe you may sell your company in the next 3-5 years, having audited financial statements for the two or three years prior to the sale can help increase the price of the sale because the potential buyer has very strong financial statements to evaluate. This is a risk/return analysis because if your company is very small you won’t realize the benefits that you will when you are larger. It is rare that you don’t see a positive return on investments from having audited financial statements before a sale, merger, or acquisition of another company.

A Requirement for Certain Government Contractors

Certain types of government contractors are required to provide audited financial statements as a condition to receiving “set-aside” government contracts. If you participate in the SBA 8a program and get to a certain size, the SBA may require you to upgrade your financial statements to either “reviewed” or audited.

For companies required to provide performance bonds, such as construction companies and subcontractors, you may qualify for a larger bond and may have a reduced cost for bonding because you have audited financial statements.

Help Reduce Internal Losses

When your company reaches a certain size (either in number of employees or sales) it may be desirable to get audited financial statements because audits can detect employee fraud. On a national basis employee fraud represents approximately 6% of company gross sales.
In addition to fraud, finding waste in larger businesses is also a potential benefit to having audited financial statements.

Your CPA can help you decide what type of financial statements should be used for your company, but keep in mind that sometimes spending the money for an audit can result in a saving you money due to theft and if you are planning to sell your business may help make the sale smoother with a higher sales price.

If you would like additional information on about how your financial statements could potentially help you when obtaining financing, please give one of our Business Finance specialists a call at 512-990-8756. We aren’t CPAs, but we know what it takes to get most types of companies financed!

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Construction subcontractors have few options when it comes to working capital financing or finding the right construction factoring company. Construction companies and their subcontractors have unique financing challenges and are often misunderstood by traditional lenders. This makes it difficult for many construction companies to work with their retail banks or even local area credit unions. A construction business needs to be as strong as garlic to qualify for a regular bank line of credit with most retail banks.  Although merchant cash advance programs are everywhere and heavily promoted online, their cost makes loan sharks look like a bargain. Many subcontractors resort to using their personal credit cards or limiting their growth opportunities because of this lack of access to working capital. There are a few glimmers of hope though, as several construction factoring companies in the U.S. do offer fair terms and conditions for advancing funds against a progress billing invoice.

 

Sub-Contractors Eligible for Construction Factoring Company programs

Construction Factoring 512-990-8756

Nearly any type of specialty sub-contractor can qualify for construction invoice factoring. Examples of specialty trades include: electrical, lighting, solar installers, masonry, concrete, demolition, excavation and site prep, and even oilfield and pipeline construction contractors. The key is having at least $1 million a year in sales and a marketing strategy and sales process to ensure you have ongoing subcontracting opportunities. Construction invoice factoring is a proven solution for fast growing trade contractors. It is not unreasonable to find subcontractors with revenues of as much $60 million a year using construction invoice factoring. Construction invoicing factoring is also a flexible financing tool for small businesses and construction companies.

 

Progress Billings or Time and Materials Billings

If you are a subcontractor that bills based on time and materials, you don’t necessarily need a specialty construction finance company, since most traditional factoring companies will finance sub-contractors that don’t use progress billings. However, it makes sense to use a specialty construction sub-contractor invoice factoring company either way because they tend to have good tools to assess the creditworthiness of the general contractors (GC). They can also be a resource when filing liens on projects.

There are probably only a half dozen specialty invoice factoring companies that finance construction sub-contractors that use progress billings. Many factoring companies say they do, but when you analyze their turn down rates, you can see very high rejection rates. The finance companies that truly specialize in construction factoring know the marketplace inside and out.  This makes it easier for trade contractors to do business with them.

Verification Process for Construction sub-contractors

There are many types and levels of verification that invoice factoring companies use. The toughest verification processes tend to be used with construction sub-contractors. The toughest is called an estoppel letter or certificate. Laws.com describes an estoppel certificate as follows:

An estoppel certificate is a signed legal document which an individual signs that establishes certain facts to be ineligible for dispute, contradiction, or recantation at a later date by the party who signs the estoppel certificate. The primary purpose of an estoppel certificate is to preclude the opportunity to file a claim that the actual unpaid balance or the applicable interest rate is different from the one being claimed at the future date.

Good luck trying to get the average GC to sign an estoppel letter. Some construction invoice factoring companies have “lite” versions of harsh estoppel letters but most all use them and most GCs won’t sign them.

Nearly any type of specialty sub-contractor can qualify for construction invoice factoring. Examples of trade contractors include: electrical, lighting, solar installers, masonry, concrete, excavation and site prep, and even oilfield and pipeline construction contractors.

Sam Thacker

President, Business Finance Solutions

The Best Construction Factoring Companies

The good news is there are a handful of construction invoice factoring companies that will streamline the verification process for sub-contractors. Some even only require telephone verification with a project superintendent. This is like the normal type of verification an invoice factoring company might use with a traditional client.

Many sub-contractors need significant outside working capital because most construction jobs have 10% held in retainage, and their margins are low.  In many markets pricing for a specific trade can be fierce, driving margins even lower.

If your construction sub-contracting company needs working capital and you have strong clients you might consider construction factoring (accounts receivable financing) to bridge the cash gaps on your projects.

Client Example: Commercial Electrical Contractor

One recent electrical contractor our company worked with had a strong business with a good profit margin. Within one month they were awarded over $4 million in new work on 5 projects. The projects were scheduled to all start about the same time with the longest project being a 17-month long project. Our client allowed us to place his invoice factoring business with a friendly specialty construction factoring company. The factor designed a verification process that the sub-contractor felt comfortable with and now the electrical sub-contractor has the cash to make sure there is always money for payroll and materials. The cost is reasonable for the electrical sub-contractor who can now grow as fast as he would like.

If you would like additional information on construction invoice factoring or small business financing options, please give one of our Business Finance specialists a call at 512-990-8756.  We can guide you in the direction of a construction factoring company that makes sense for your growing business. We’ll help you calculate the opportunity costs of not taking a new project versus the cost of different types of business financing. Let us help you pick the right construction factoring company for your business.

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For non-oil and gas folks, PDP simply means the oil, natural gas, or natural gas liquids are coming out of the ground right now and their immediate economic value.

Why is this a great time to buy PDP?

Well it’s the end of the year and oil producers are looking to make their property portfolios and balance sheets look the best they can be for their shareholders.  For the next sixty days or so, oil producers big and small will be selling off their less than perfect properties to raise money to move into more productive fields while oil prices are relatively low.  So, now is a great time to shop and acquire some of the better non-core PDP assets of small cap, mid-cap, and large cap oil producers making portfolio adjustments.

#1 reason to buy PDP Now:  Inventory is Still Good

Right now, many large oil producers like ConocoPhillips, Apache, and BP are identifying the PDP properties they plan to sell in the first quarter of 2017.  They are getting the data rooms set up for the properties and getting ready to open the bidding.

While most property available through auction boards are lease properties without existing production, there will be many properties that have 800 – 1,500 boe/d (barrel of oil equivalent per day). These properties will be offered for sale the next three to four weeks.  There will also be many properties off the public listing sites that are for sale only through private sources.

Business Finance Solutions helps E&P companies finance PDP properties.  We have found that the easiest properties to finance are the ones that have a good amount of existing production, and for whatever reason are no longer attractive to their current owners. The best properties for quick financing should also have upside potential with locations on the lease to drill new wells (PUD). If the new operator can decrease operating costs or increase production the deal is golden.

In our opinion the best properties, are those where natural gas and condensates represent less than 50% of the total produced petroleum volume.

Even though the price of oil is in the low 50s right now, the price is still too low for large E&P companies to justify keeping wells that are not 500 boe/d producers. Large E&P companies need prices in the mid $60s to make the production profitable on these lower producers, but small operators can make a profit at a much lower price point.

Use equity and or debt financing to buy PDP.

#2 reason to buy PDP Now: Financing Is Available

Although regulated energy banks have stopped making loans to most small E&P companies, private equity funds still have deep pockets ready to invest as equity partners or loan as mezzanine capital.

Private equity funds are picky about which companies they will back, but if you have a great management team and solid growth plan, money is available for PDP deals. Business Finance Solutions has relationships with many private equity funds that finance existing production (PDP).

There are as many ways to finance the purchase of existing PDP as there are private equity funds available to bring money to the table.  All you need is a little patience and an open mind to craft a financing plan that fits both your company’s goals and the funds ROI goals.

#3 reason to buy PDP Now: The Upside Potential Is Enormous

The short-term upside of buying an existing field is immediate positive cash flow. A smart operator can also increase profits by reducing operating expenses.

In most cases, large companies have high overhead costs that erode the ROI on profitable properties. A small E&P company may be able to decrease operating cost by 10% to 30% from day one of ownership. These operational savings mean immediately higher profits from the same property.

Mid-term upside potential can be created by making repairs and upgrading equipment on existing wells to ensure all wells are working and producing.  Smaller E&P companies can give more attention to the upkeep of all their wells than can mid-sized or large E&P companies who only focus on their “prime producers”.

Long-term upside potential can be created by drilling new wells.  Drilling shallow or conventional wells can produce modest amounts of new productions and profits, even with today’s low oil prices.

We have one client who has identified five conventional wells to drill in 2017 for a total cost of about $2.3 million.  Expected production should be about 150 boe/d. With a low decline curve, this type of well is quick to pay back and does not present significant financial risk to drill.

Business Finance Solutions has help small E&P companies finance their growth strategies.  We have also worked with accidental entrepreneurs, those seasoned oil and gas professional who have ventured out on their own and built scrappy teams to capitalize on good opportunities.  In either case, our team of business strategists help our clients craft a business case for the funding they need to take advantage of market opportunities.  We also handle the introductions and negotiations with equity funds, to achieve the best financing solutions for our clients.

Call us at 512.990.8756, or contact us via email if you are considering a PDP acquisition strategy. We will be happy to share our insights and assist you

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The OPEC Agreement Is Tenuous At Best

OPEC producing countries throughout the world.

OPEC members are not known for playing by their agreements. There is a good chance that the agreement could fall apart during the next OPEC meeting December 10, 2016. For the agreement to hold, many analysts estimate that both OPEC and non-OPEC producers like Russia must all participate and bring down production by 1.7 million barrels to make a significant difference.

There Are A Number Of Spoilers In The Market

Currently, Russia (a non-OPEC producing nation) is producing at near full capacity. Russia is producing approximately 11.2 million barrels per day (a 30-year high) and Russia has signaled that it may not cooperate with OPEC. If Russia doesn’t play, then OPEC countries like Iran, Venezuela, and even Saudi Arabia may not honor the agreement. Even if all OPEC and non-OPEC oil producers agree to their assigned reductions, there is a long history of cheating which wouldn’t really help in decreasing production.

Production needs to be reduced by about 1.7 million barrels a day, and OPEC’s agreement is only requiring a 1.2 million barrel per day reduction.

OPEC is Increasingly Becoming Irrelevant To The World Oil Economy

Back in 1973 when OPEC began asserting its power in the oil economy, the price of a barrel of oil rose from $3.00 to $12 globally. The U.S. economy reeled as a result. There was a repeat of OPEC’s dramatic influence in the early 1980s.

Middle-Eastern oil was the largest source of oil for the world and when they turned off the spigot, they demonstrated to the world they could control the price of oil. Fast forward to today, shale oil, technology, and industrious oil and gas people have dramatically raised the production output in non-OPEC countries like the U.S. Since the gas lines of 1973, the U.S. has risen dramatically in oil production. Now the third largest producer behind Russia and Saudi Arabia, the U.S. is producing about 9.5 million barrels of oil per day. Other non-OPEC countries that are large producers include China, Canada, Brazil, Mexico, Norway, the United Kingdom, and Columbia.

Technology like horizontal drilling and fracking has allowed countries like the U.S. to dramatically increase their daily production. For every barrel of oil produced in a non-OPEC country, OPECs influence decreases a little.

OPEC’s Meeting On December 10, 2016

OPEC’s next meeting will be December 10^th. If they can’t get Russia (the largest non-OPEC oil producer) on board with production cuts, there is a good chance the current agreement will fall apart. If that happens, some experts predict the price of oil could drop into the 30s and even the high 20s. If that happens, there is really no reason for the price to rise until existing inventory drops. Should there be no artificial production decreases among OPEC countries, the only event that will decrease the current inventory and drive the price of oil back up will be increased demand caused by economic growth. The only two countries in the world that could make a large difference in demand are China and India. A tiny bump in their GDP would cause a significant increase in demand for oil, thus allowing the price to rise.

The price of crude oil is has dropped nearly 70% since 2014 to a low of $27.00.

Other Issues That Could Affect the Price Of Oil In The Short-term

Historically, December is the lowest demand month of the year in the U.S. Demand for oil is low in December happens because refineries often do maintenance in the last two weeks of December and the first several weeks of January. Additionally, refineries often want to reduce their finished inventories by December 31^st to decrease tax they must pay on finished inventory. Finally, even though American travelers travel for December holidays, they travel less in December than they do in Summer months.

How Low Can The Price Of Oil Drop This Year?

Last January the price of oil dropped into the $20s. That low price remained started in December and didn’t start rising until February 2016. It is not unreasonable to see a similar drop this season, though the bottom might be in the low 30s rather than the mid-twenties.

If you are in the business of buying existing production, we could see the next six months being a buyer’s market. Should this prediction become reality, the price should slowly rise to the mid $40s by late Spring.

The principals of Business Finance Solutions have been helping oil and gas E&P companies and service companies raise equity and secure debt since 1994. Contact us by online form or call at 512.990.8756 if you would discuss your company’s capital needs.

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