PRACTICE NOTE

Oil & Gas Asset-Backed Securitizations

by G. Michael O’Leary, Thomas Y. Hiner, and John J. Dedyo of Hunton Andrews Kurth LLP with Practical Law Finance

Status: Maintained | Jurisdiction: United States

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A Practice Note discussing securitizations of oil & gas assets including the assets best suited
for this structure and the parties and documents involved in these transactions. This Note also
discusses the factors driving the use of this structure and the benefits and challenges it presents
to independent oil & gas producers.

Independent oil & gas producers often use reserves • The oil & gas assets that are best suited for a
based lending (RBL) and high yield debt to finance their securitization.
operations. However, in periods of economic uncertainty
• The benefits and disadvantages of these securitizations.
and commodity price volatility some producers have
difficulty accessing these traditional sources of capital. This • How these transactions are structured including the key
has been exacerbated in recent years as some commercial parties and documents involved in these transactions.
bank lenders have reduced their exposure to the upstream • Certain key issues independent producers and their
oil & gas segment in response to stakeholder concerns counsel should consider when undertaking these
about climate change or to comply with or implement their transactions.
sustainability strategies under their environmental, social,
and governance (ESG) policies. Interest rate hikes are also For information on the traditional sources of financing for
increasing the costs of borrowing, rendering borrowing at oil & gas assets, see Practice Notes, Reserve Based Loans:
commercially attractive rates unavailable for some of these Issues and Considerations, An Overview of Volumetric
producers. Production Payments (VPPs): Issues and Considerations,
and High-Yield Indenture: What are Financial Covenants
Investor interest in high-yield notes offerings and and Ratios?.
traditional preferred and common equity offerings in this
industry has also fallen as volatility has risen. Concerns
about stranded asset risk and general uncertainty about Basics of a Typical Securitization
the long-term viability of investments in the oil & gas A securitization is a credit-enhancing financial structure
sector as the energy transition continues apace are also in which the owner of cash flow-producing assets (the
affecting lender and investor interest. sponsor) packages or pools some of these assets and
With traditional sources of financing on acceptable terms transfers them (in a sale or a contribution of capital, or
being unavailable or insufficient to meet their capital combination of both) in a transaction that constitutes
needs, independent producers are increasingly turning to a true sale or absolute transfer for purposes of the
securitizations of their interests in oil & gas assets to fill Bankruptcy Code to a newly formed, bankruptcy remote,
the gap and generate the capital they need to finance their special purpose entity (SPE). The SPE (also known as
operations. Despite their inherent complexity, securitizations a special purpose vehicle (SPV)), concurrently with
with their credit enhancing attributes have opened up a the transfer, issues notes in a Section 4(a)(2) private
new source of needed capital for producers with significant placement or a Rule144A offering to investors and
proved developed producing (PDPs) properties. uses the proceeds (net of certain fees and other agreed
deductions) to pay the sponsor for the transferred assets.
This Note explains how some producers are using asset- The SPE pledges its rights in and to the transferred assets
backed securitization (ABS) to generate capital. It also to the investors as security for the notes.
discusses:

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 Oil & Gas Asset-Backed Securitizations

The notes are non-recourse to the sponsor and the Type of Offering
investors can only look to the securitized assets and
the cash flows they generate to repay amounts owed Securities offered and sold in the US are subject
under the notes. For more information on securitizations to registration with the Securities and Exchange
and a diagram illustrating the basic structure of a US Commission under the Securities Act of 1933, as
securitization, see Practice Notes, Securitization: US amended (Securities Act), unless an exemption from
Overview, Securitization: US Transaction Parties and registration is available. Oil & gas securitizations are
Documents, and Securitization: The SPV. typically structured to satisfy either a Section 4(a)(2)
private placement or a Rule 144A resale, although most
Securitizations have traditionally been used to pool of the securitizations that have been consummated
financial assets including mortgages, automobile loans, to date have been structured as private placements.
accounts receivable and in some cases future cash Both methods constitute private offerings of securities
flows. The use of this structure to pool oil & gas assets is to sophisticated investors, although they differ in
relatively new. Although a few oil & gas securitizations significant ways, including types of investors involved
were consummated before 2019, independent producers and documents (see Differences Between Rule 144A and
have mostly relied on traditional capital sources for Section 4(a)(2) Offerings).
their financing given the liquidity available in the
debt and capital markets. However, as these markets Rule 144A/Regulation S Offerings
have tightened, securitizations are increasingly being
Rule 144A provides a safe harbor for persons other than the
considered despite the challenges they present (see
issuer to resell eligible securities to qualified institutional
Principal Disadvantages of Securitizations).
buyers (QIBs). These are typically institutional investors,
such as mutual funds and insurance companies. In this
Structuring an Oil & Gas case, the SPE sells the notes to one or more underwriters
(or initial purchasers) under a Section 4(a)(2) private
Securitization placement, which then resell the notes to QIBs under Rule
An oil & gas securitization follows the basic premise of 144A. If any of the QIBs are non-US investors, these resales
a standard securitization but there are key differences are made under Regulation S. For more information on
because of the nature of oil & gas assets. Unlike the assets Rule 144A offerings, see Practice Note, Resales Under Rule
typically included in a traditional ABS transaction: 144A and Section “4(1½).”
• Oil & gas assets can have complex ownership
arrangements that must be understood. Interests in oil
Section 4(a)(2) Private Placements
& gas assets may be categorized in different ways giving Institutional investors often participate in the private
the producer (and post-transfer, the SPE) different placement market under the traditional Section 4(a)(2)
rights and obligations that must be reflected in the exemption from registration. In this case, they purchase
securitization documents (see Oil & Gas Assets to be the debt securities directly from the issuer and not from
Securitized). an underwriter. These sales are exempt from registration
• Oil & gas assets are subject to commodity price volatility under the Securities Act if certain conditions are met. For
leading to uncertainty regarding the amount of revenue more information on Section 4(a)(2) private placements
the SPE may earn. and these conditions, see Practice Note, Section 4(a)(2)
and Regulation D Private Placements.
• An oil & gas securitization is a future flow securitization.
The revenues underpinning the transaction do not Differences Between Rule 144A and Section 4(a)(2)
exist at the time the transaction is completed. The
Offerings
hydrocarbons (crude oil, natural gas, and natural gas
liquids (NGLs)) must first be extracted or produced, There are several significant differences between a Rule
where appropriate, processed, and finally sold before 144A offering and a Section 4(a)(2) private placement,
revenue is generated. This means that the notes are including the number of investors typically involved, the
secured by payments that have not been earned. The documentation, disclosure requirements, and potential
SPE expects to generate the amount needed to repay securities law liability. For more information on these
the debt by selling the production to which it is entitled differences, see Practice Notes:
in the normal course of operations.

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 Oil & Gas Asset-Backed Securitizations

• Unregistered Offerings: Overview. and operating costs from the sale of the hydrocarbons
produced from the securitized assets. By contrast, if the
• Practice Note, Conducting an Unregistered Offering:
producer sponsor’s interest is an ORRI, the SPE may be
Overview.
entitled to the proceeds without the deduction of these
• Section 4(a)(2) and Regulation D Private Placements. costs. The nature of the interests therefore affects the
• Preparing an Offering Memorandum: Rule 144A/ SPE’s obligations, revenue, and amounts available to
Regulation S Debt Securities Offerings. repay the notes.
For more information on these different types of interests,
Oil & Gas Assets to be Securitized see Practice Notes, Oil & Gas Leases (TX), Overriding
Royalties and An Overview of Volumetric Production
The oil & gas assets to be securitized should be limited
Payments (VPPs): Issues and Considerations and Upstream
to those that have low engineering and production risk
Oil and Gas Company Structure and Players Flowchart.
and can generate reliable and stable cash flows to service
the debt. An investment grade rating for the notes is a An oil & gas asset securitization requires the isolation
condition precedent to the closing of a transaction. To of the PDP wellbores assets from the producer sponsor
achieve this rating, there must be reasonable certainty (see Bankruptcy Remote). Accordingly, potential
that the oil & gas wellbores to be securitized can generate producer sponsors should consider whether the asset
sufficient hydrocarbons to repay the debt. As a result, transfer to the SPE:
the reserves the producer sponsor transfers to the SPE
• Is permitted under their existing debt documents. If the
should be PDPs (proven, developed and producing)
producer sponsor is party to any RBLs or secured high
wellbores with long production histories and low decline
yield debt where its assets are pledged to the lenders,
rates. They should also be geographically diverse, mature it must obtain the necessary lender consents before
wells or a relatively similar set of assets with steady it can transfer the assets to the SPE. Some producers
production expectations and minimal additional capital have refinanced their RBL borrowings with the proceeds
and operating expenses required to maintain production. of their securitizations which decreases the use of their
For more information on these reserves, see Practice RBLs and strengthens their balance sheets.
Note, Reserve Based Loans: Issues and Considerations:
Categories of Reserves. • May result in a borrowing base reduction that may
outweigh the benefits of the securitization. If the RBL
While the assets are limited to PDPs, the nature of the facility is not repaid in full, the transfer reduces the
producer sponsor’s ownership interest in these wellbores value of the producer sponsor’s reserves potentially
may vary. Interests in oil & gas assets can be delineated in triggering an interim redetermination of the borrowing
a variety of ways. Examples include: base; although it is worth noting that the value
attributed to the proposed PDP reserves to be subjected
• Operating working interests. to the securitization often exceeds significantly the
• Non-operating working interests. value attributed to same under the producer sponsor’s
RBL facility (see Advance Rate).
• Royalty interests.
For more information on RBLs and the borrowing base,
• Overriding royalty interests (ORRIs).
see Practice Note, Reserve Based Loans: Issues and
• Volumetric production payments (VPPs). Considerations: Re-Determining the Borrowing Base.
• Net profits interests where an amount is paid to the
mineral estate owner or investors only when a net profit Key Parties Involved
is realized (after the deduction of all expenses). The SPE’s sole role in the oil & gas securitization is to hold
Each of these interests in PDP wellbores may be the securitized assets and issue the notes. Any actions
transferred to the SPE and serve as the source of funds the SPE must take related to the assets and notes are
to service the notes. However, the producer sponsor’s performed by the producer sponsor or an affiliate under
rights and obligations and therefore the SPE’s rights and a joint operating agreement (JOA) and a management
obligations post-transfer may vary significantly depending services agreement (MSA). However, the transaction
on the nature of the producer sponsor’s interest. For involves several other parties besides the SPE and
example, in the case of an interest constituting a working producer sponsor. These parties include a credit rating
interest, the SPE may be required to pay certain drilling agency, various agents, and the following entities:

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 Oil & Gas Asset-Backed Securitizations

• ABS holding company. This is a wholly owned may also be involved in hedging the producer sponsor’s
subsidiary of the producer sponsor which owns all of production under its retained oil & gas assets. For
the equity interests of the SPE. The holding company timing purposes, the producer sponsor or applicable
pledges all of its interest in the SPE to the ABS investors affiliate that has the existing hedges on the oil & gas
as part of the securitization. In the case of a default by assets to be transferred may novate these hedges
the producer sponsor, the ABS investors can exercise to SPE at closing. A full discussion of ABS hedges,
their rights under the equity pledge agreement and gain including novation, are complex and beyond the scope
control of, or dispose of, the SPE and its assets. of this Note. However, for more information on hedging,
see Practice Note, Hedging Oil and Gas Production:
• ABS investors. Oil & gas securitizations are drawing
Issues and Considerations and for more information
interest from a wide range of investors, including those
on novation, see Practice Note, Novation, Accord and
not that have not traditionally invested in the oil & gas
Satisfaction, and Substituted Contracts, and Standard
industry. These include insurance companies, large
Documents, Novation Agreement (Short Form) and
asset managers, pension funds, and other investors
Novation Agreement (Short Form) (NY).
looking for an investment grade investment with stable
cash flows or to diversify their ABS holdings. • Investment banks. As with any other private placement
or capital markets offering, investment banks function
• Hedge provider. ABS investors are solely relying on
as structuring advisors and placement agents and
the cash flows generated by the oil & gas assets for
arrangers in these transactions.
repayment. A material decline in oil & gas prices
reduces the SPE’s cash flows and may seriously • Back-up manager. As discussed above, the producer
jeopardize its ability to make the payments required sponsor operates the oil & gas assets under the JOA
under the notes. The SPE enters into hedge agreements and performs various administrative and management
with creditworthy counterparties to minimize this risk services for the SPE under the MSA. If the producer
and commodity price volatility. These hedges cover sponsor breaches any of its obligations under the
a significant percentage of the hydrocarbon and MSA, the ABS investors can replace it with the back-
hydrocarbon products produced by the securitized up manager under a back-up management services
assets during the expected life of the ABS notes and agreement.
for some period thereafter, which may be a longer term
The diagram below illustrates the basic structure of an
than customary commodity price hedges. Depending
on the transaction and the parties, the hedge provider oil & gas securitization.

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 Oil & Gas Asset-Backed Securitizations

Principal Advantages of property records. The SPE’s governing documents should

also include well-established separateness provisions to
Securitizations mitigate the risk of substantive consolidation with the
Oil & gas securitizations have several advantages over producer sponsor if a bankruptcy proceeding occurs.
RBLs, high yield debt, and VPP interests. By selling its For more information on true sales and substantive
assets to the SPE, instead of drawing on its RBL facility or consolidation, see Standard Document, Substantive
securing a second lien loan, a producer sponsor can secure Nonconsolidation and True Sale Opinion: Asset-
the liquidity it needs for other parts of its business without Backed Securities (ABS) and Practice Note, Substantive
increasing its debt load. Other advantages include: Consolidation in Bankruptcy. For more information
• The producer sponsor can access new types of investors on executory contracts, see Practice Notes, Executory
(see New Class of Investors). Contracts and Leases: Overview and Executory Contracts
and Leases in Bankruptcy: Strategies for Non-Debtors.
• The SPE is separate from the producer sponsor (see
Bankruptcy Remote).
Higher Credit Quality
• The securitized assets are of higher credit quality and
have a lower risk profile than the producer sponsor’s Because the transaction requires the true sale or
other assets (see Higher Credit Quality). absolute transfer of a specific pool of PDP assets to a
separate bankruptcy-remote entity, it shifts the focus
• The producer can secure a higher debt amount (see of the investors’ credit risk analysis from the health
Advance Rate). and operation of the producer sponsor to the financial
performance of the SPE’s isolated pool of assets. The
New Class of Investors notes’ credit rating is based on the production risk profile
Because of its limited obligations and higher value assets, of the underlying pooled assets with the credit quality of
the SPE is more creditworthy than its producer sponsor and the producer being a secondary factor.
may therefore attract investors that would not otherwise be Accordingly, depending on the risk profile of the
interested in the producer sponsor. Pension funds, insurance underlying assets, the structure of the securitization, the
companies, large money managers, and other institutional amount of collateral supporting the notes, and the costs
investors that often participate in ABS deals in search of and expenses that may materially affect the cash flow
stable cash flows may also be interested in this product. coming into the account of the SPE, the notes may be able
These investors also may not harbor the same reservations to obtain an investment grade rating, even if other debt
regarding energy investments that traditional oil & gas securities issued by the producer sponsor cannot achieve
investors have developed toward the industry because of this rating. Limiting the asset pool to PDPs, for which only
concerns related to sustainability and the clean energy minimal capital and operating expenses are required in
transition. These investors also have significant capital order to maintain production, increases the likelihood that
they must deploy, which may make them more willing to the ABS notes can secure this rating.
tolerate some measure of increased risk as compared to
more traditional securitization products, to earn a more Advance Rate
attractive yield. This is the percentage of the value of the eligible oil &
gas assets that the lenders commit to the borrower. The
Bankruptcy Remote advance rate in an ABS transaction is based on the PDP
The conveyance of the assets into the securitization PV-10 and is typically 55% to 75%, much higher than
transaction, if properly structured, should constitute a that typically available in RBLs. This rate is based on an
true sale so that if a bankruptcy proceeding involving the independent engineer’s valuation of the assets set out in a
producer sponsor occurs, the transferred assets cannot be reserve report. As such, it varies depending on the quality
deemed to be a part of the producer sponsor’s estate. of the securitized assets.

Achieving bankruptcy remoteness is problematic for

Risk Mitigation
executory contracts. It is therefore crucial to the true sale
analysis that the interests being transferred to the SPE Depending on the size, location, and value of the PDPs
constitute real property interests for state law purposes, that make up the securitized assets, the producer sponsor
with the conveyance being recorded in governmental real may not be able to sell the relevant interests. Pooling

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 Oil & Gas Asset-Backed Securitizations

these assets into a single financial product spreads the For a chart summarizing the differences between oil & gas
risk of any individual asset and, accordingly, may attract securitizations and high yield debt, see Summary of Key
more investor interest. Differences Among PDP Securitizations, RBLs, VPPs, and
High Yield Debt.
Advantages of Securitizations Versus
RBLs Advantages of Securitizations Versus
Unlike RBLs, securitization facilities do not include any
VPPs
risk of periodic redeterminations of the borrowing base. VPPs have been more widely used than securitizations
The interest rate and the amount borrowed under the by producers looking to raise capital from nontraditional
securitization are determined at the time the facility is financing sources. VPPs typically take the form of
arranged and are not affected by future commodity price overriding royalty interests over a certain term, but may
fluctuations. This feature may be particularly appealing also consist of other oil & gas interests.
to oil & gas companies grappling with redeterminations
Pure VPPs have many similarities to securitization
under their RBLs. Because of the potentially higher
facilities, but also differ in significant ways. For
advance rates available in securitizations, the asset values
instance, like securitizations, properly designed VPPs
assigned by investors in the securitization market typically
get beneficial treatment under US bankruptcy laws
exceed the borrowing base valuations employed by
and are not subject to redeterminations of a borrowing
commercial banks in RBL transactions.
base. However, VPPs may not be as appealing as
Other advantages include: securitizations to ABS investors for several reasons
including:
• The maturity dates for these ABS securities are typically
longer than RBL maturity dates. • VPP transactions do not typically include the interest
reserve accounts found in securitization facilities,
• The ABS notes are amortized. There is also flexibility
which help reduce the risk of nonpayment should the
to adjust the amortization schedule (see Terms of the
anticipated cash flows generated by the underlying
Transaction).
assets fall short of estimates.
For a chart summarizing the differences between oil & gas
• The tenor of VPPs are typically shorter than those of
securitizations and RBLs, see Summary of Key Differences
securitization facilities.
Among PDP Securitizations, RBLs, VPPs, and High Yield
Debt. • Unlike a VPP, if the SPE fails to achieve a specific
coverage ratio or production metric, the securitization
For more information on RBLs and redeterminations, facility may require a portion or all of the cash flows
see Practice Note, Reserve Based Loans: Issues and in excess of the debt service payments to be swept
Considerations: Re-Determining the Borrowing Base. from the SPE’s bank account and used to service its
debt instead of being distributed to the producer
Advantages of Securitizations Versus sponsor.
High Yield Debt A producer can also securitize VPPs to benefit from the
Many oil & gas companies are finding the cost of advantageous features of both structures (see Oil & Gas
capital implied by secured or unsecured senior notes Assets to be Securitized). For example, Riviera Resources,
too high. High-yield debt investors have increasingly Inc. in 2019 transferred a VPP of quantities of helium
soured on this industry and their lack of interest is to an SPE, which then issued notes and delivered the
reflected in their high cost and lack of availability. proceeds to Riviera (see Press Release, Riviera Resources
Securitization provides an avenue to lower cost debt Announces Closing of $82 Million Volumetric Production
while the high-yield debt market remains too expensive Payment Transaction (”VPP”))
or even inaccessible to most independent producers. For a chart summarizing the differences between oil &
Because asset-backed securities generally have flexible gas securitizations and VPPs, see Summary of Key
refinancing terms, securitization facilities may be Differences Among PDP Securitizations, RBLs, VPPs,
refinanced with high-yield senior notes when the high- and High Yield Debt.
yield market recovers.

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 Oil & Gas Asset-Backed Securitizations

For more information on VPPs and how they are structured, Ratings Requirement
see Practice Note, An Overview of Volumetric Production
Payments (VPPs): Issues and Considerations. Most ABS investors require that the notes be rated by one
or more nationally recognized credit rating agencies. The
arranger in the securitization may apply various credit
Principal Disadvantages of enhancement techniques to improve the securities’ credit
Securitizations rating and make them more appealing to certain types of
investors (see Practice Note, The Securities Issued in a US
Although there are many advantages to pursuing a Securitization: Credit Enhancement).
securitization, there are several disadvantages producers
and their counsel should consider when evaluating this Reduction in Borrowing Base
form of financing. They include:
Inasmuch as securitizations fundamentally depend on the
• High level of complexity and transaction costs (see
SPE and the transferred assets being outside the credit of
Complexity).
the producer sponsor, securitizations reduce the producer
• Loss of proved reserves and reduction in producer sponsor’s proved reserves available to support its own
sponsor’s borrowing base (see Reduction in Borrowing borrowings away from the securitization during the term
Base). of the indenture.
• Ratings requirement (see Ratings Requirement).
No-Call Period
• A prepayment penalty (see No-Call Period).
PDP securitization transactions typically include a no-call or
Complexity make-whole provision, which assesses a penalty if the notes
are paid before their maturity date. Prepaying the ABS
A securitization is a more complex financing structure notes may therefore be costly, if not precluded. However,
than more traditional oil & gas financing structures, most securitization structures are portable if the sponsor is
resulting in higher transaction expenses. The ratings transferred as a whole (the operator and manager entities
process also extends the time needed to complete a are also transferred with the SPV). A sponsor should be
securitization as compared to traditional financings aware of the potential difficulty and costs of unwinding the
because of the many factors that must coalesce before the structure shortly after implementation.
ratings are issued, including:
• Conducting title due diligence on all the assets. While in Diverse Asset Pool
a typical RBL transaction, title due diligence may apply
Diversification of the underlying assets is a key
to 80% to 90% of the assets and often can be completed
consideration for rating agencies. Independent oil & gas
post-closing, this process must be completed as a
condition precedent to the closing of the ABS transaction. companies that are a pure play in a single basin may
not be able to obtain optimal pricing or their desired
• Putting hedges in place to mitigate commodity price credit rating due to an inability to pool a diverse set of
volatility. underlying assets. For example, Raisa Energy LLC in:
• Carefully reviewing the producer sponsor’s existing • 2020 combined 700 non-operating wellbore interests
debt documents to ensure they do not prohibit that spanned five states and operated by 35 different
a securitization transaction. If there are existing operators.
prohibitions, an amendment of these agreements may
be required, extending the time to completion. • 2022 closed the industry’s first Oil and Gas Master Trust
Securitization Program which involved a diversified
However, once the securitization facility is arranged, it portfolio of non-operated working interests and royalty
is typically much easier to replicate it for future funding interests consisting of more than 3,000 wellbores under
needs. Several of the companies that have completed more than 50 operators located in more than 20 counties.
securitizations entered into several more within a
In each case, the notes received an “A” investment grade
relatively short time period. For example, Diversified
rating.
Energy closed four securitizations in 2022. The first was in
February, quickly followed by another later in February, in For more information on different basins, see Practice
May, and in October. Note, US Oil & Gas Industry: Overview.

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 Oil & Gas Asset-Backed Securitizations

Hedging Requirement • The producer sponsor’s servicing fees.

Another issue posed by securitizing oil & gas interests • Debt service on the notes.
is the risk of commodity price fluctuations to which • Any amounts needed to fund the reserve accounts.
the underlying assets are subject. To mitigate this risk,
companies should expect to hedge a significant portion of The producer sponsor may receive distributions after
the SPE’s production over a lengthy period. For example: all other amounts have been paid subject to blockage
provisions that may require the deferral of payments
• as part of its second securitization facility in April 2020, under certain circumstances.
(Diversified Energy Company PLC (formerly, Diversified
Gas & Oil) hedged 85% of its SPE’s production for a
period of ten years.
Reporting Requirements
• Terra Energy Partners LLC closed a securitization in In a securitization, the producer sponsor operates the
December 2022 that requires hedges covering 85% of assets and reports to the ABS investors, similar to the
NGL exposure for the first three years. Hedges for 85% reporting requirements of an RBL, but these reporting
of the natural gas exposure is required for first three requirements are more robust than those included in
years but falls to 80% during the next two years. a typical loan, particularly around monthly cash flow
statements. ABS investors also require a detailed
• Jonah Energy closed a securitization that requires accounting of revenue and disbursement of funds
hedges covering about 80% of its gas and oil production
through the waterfall.
for about 6 years and NGLs hedges for two years.
However, in the current volatile commodity price
environment, effective hedging may prove to be difficult to
Key Oil & Gas Securitization
obtain. Consequently, hedging may have to be arranged Documentation
with a creditworthy counterparty outside the established
The main documents in an oil & gas ABS transaction
hedging market. Significant difficulties securing hedge
include:
counterparties may limit the growth of this financial
instrument. • The indenture.

The hedge counterparty is also a secured party under the • A transfer agreement to convey or transfer the producer
indenture and security documents. These parties may sponsor’s interest in the assets to be securitized to the
also be higher in the payment waterfall, adding to the SPE.
complexity of the negotiations. • A JOA.
• An MSA and a back-up MSA.
Terms of the Transaction • An equity pledge agreement.

Payment and Waterfall • Mortgages and related security documents.

Revenues earned from oil & gas produced from the • ISDA® agreements (see, for example, Practice Note,
securitized assets are distributed according to a waterfall Understanding the ISDA® Master Agreement and
under which obligations are paid according to an agreed Schedule).
distribution order. The exact nature of the distribution
varies depending on the nature of the interests in the pool. Securitizations and ESG
For example, if the transaction includes working interests,
the SPE is responsible for a portion of the exploration, Depending on the needs of the producer sponsor and
drilling, production and completion and operating costs the investors, the transaction can incorporate ESG
which must be contemplated in the waterfall distribution. principles. Diversified Energy Company PLC closed
By contrast, if it a non-working interest, for example an several transactions in 2021 and 2022 that align with the
ORRI, the SPE is not liable for any production costs. Sustainability-Linked Bond Principles including:

The obligations typically included in the waterfall include: • In October 2022, it closed a $460 million securitization
of certain co-owned producing natural gas and oil
• The SPE’s obligations to pay any expenses related to assets located in Oklahoma. The terms of the issuance
the assets. are linked to key performance indicators (KPIs) based

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 Oil & Gas Asset-Backed Securitizations

on emissions reduction targets. This facility has a fixed

coupon of 7.50%.
• In May 2022, it closed a $445 million securitization of
substantially all of its remaining unsecuritized natural
gas and oil assets in Appalachia. This financing is also
linked to KPIs based on emissions reduction targets.
For more information on these principles, see Practice
Note, Understanding Sustainability-Linked Bonds.

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