Volumetric Production Payments - Analytical Implications and Adjustments for E&P Companies

Abstract

For several decades, volumetric production payment (VPP) transactions have been an option for smaller exploration and production (E&P) companies to monetize a portion of specific oil and gas properties to fund growth. In the current high commodity price environment, VPP's also have been used to facilitate the acquisition of properties that have steep production decline curves. This structure appears to allow an E&P company to acquire the longer lived production and undeveloped potential of the target properties while having a financial investor fund the high price for current flush production that is in steep natural decline. VPP's have also been strongly advocated by activist shareholders, including hedge funds, as a means for an E&P company to return capital to shareholders. E&P companies with weak capital reinvestment results have been particularly vulnerable to this sort of shareholder pressure. The future use of VPP's will likely be driven by its perceived benefits for acquisition structuring or by the degree to which the capital markets believe VPP's increase shareholder value.