Anatomy of a Deal

by Jeffry S. Pfeffer :: March 31, 2014

Much of North Dakota’s natural gas is going up in flames. With 17,500 miles of gas pipelines dissecting the state, the issue of capturing gas at local gathering sites and, at the same time, reducing flaring (the burning of natural gas that cannot be processed or sold) looms large. When observed from satellite, the candlepower of light emanating from this region’s gas flaring is equivalent to the light coming from the major metropolitan cities of the U.S.

One company working to reduce flaring is Billings, Montana-based GTUIT. The company manufactures trailer-mounted portable units that capture gases that would otherwise be flared, and transfer it directly to flatbed-mounted tanks.

The Financial Situation

In 2013, a traditional bank-owned equipment-leasing provider referred GTUIT to CapX because their needs were too early stage for a bank or institutional lessor. GTUIT had just procured its second major exploration and production (E&P) company contract and required anywhere from $7 to $10M of new capital to build its proprietary equipment to support the contract.

At the time of review, GTUIT had minimal revenue as they only had a few of their natural gas collecting and pollution control units in the field and were servicing their first E&P customer. The company had just raised equity for research and development. A potential venture debt round of capital would both fund the equipment build and minimize equity shareholder dilution.

The Opportunity

Upon interviewing North Dakota state level industrial commission officials along with Bakken industry consultants, CapX gained more in-depth knowledge of the severity of flare gas pollution and the need to control it. The State of North Dakota was pursuing tighter regulations on the flaring of by-product natural gas that abundantly flowed from new oil wells in the Bakken region. E&P companies with new Bakken wells (and material oil output) have up to a year to control the flaring of gas so it does not pollute the atmosphere. Industry officials offered up unsolicited praise of the GTUIT technology, stating GTUIT appeared to be the market leader amongst some more inefficient and inconsistent performing earlier technologies.

The GTUIT unit’s ability to flash freeze the natural gas coming through its unit and collect NGLs in their on-site tanks provide a second revenue stream that makes the GTUIT business model attractive. The Bakken has 30-40 new oil wells that come on-line per month and GTUIT’s mobile units can easily be allocated to the gas rich wells that need noxious flare curbed. GTUIT’s value is on these newer wells and will remain a valued and repeatable technology for other fracking intense regions such as Permian, Eagle Ford, Utica, Canadian and other shale oil rich geographic areas.

CapX additionally interviewed the E&P customer who had ordered 15 GTUIT units to be constructed and immediately deployed to its wellheads in the Bakken region. This E&P had experience using predecessor technology, which according to them, had proved to be unreliable (understandable given the newness of the technology). GTUIT themselves had anticipated downtime and performance issues as this winter has been one of the coldest/harshest in over 20 years. They used this experience to continually improve their equipment (tested for extreme heat but not necessarily for cold).

In addition to competitor’s technology concerns, the service offered by the other companies was inconsistent at best…an area in which GTUIT takes great pride. They are rated highly in the availability of its field crew to their clients and have continually improved their service by upgrading their maintenance facility as well its proximity to the oil fields.

The Deal

CapX stepped in and saw that the strength of the underlying multi-year E&P contracts for the GTUIT equipment and per unit economics were favorable due to minimum contractual payments and the value of the natural gas liquids in the marketplace that were being collected by the GTUIT units per well site.

CapX structured a venture equipment lease co-terminus with the E&P contract whereby the contract covered a minimum of 150% of the scheduled lease payments early in the lease term and greater than 100% at all times. CapX’s structure also included a warrant for a portion of GTUIT’s fully diluted equity.

For the earlier stage risk of investing as much capital in the company as its investors, CapX received equity upside while its investment will be returned in three to four years through its venture lease matched to the underlying E&P contracts. Should the technology prove to be as successful as thought, management and the strategic family office shareholders believe that a large oil and gas services company will need to acquire GTUIT for its regulatory compliance and high margin features to its business model.

This article is part of our ongoing series taking a closer look at an industry and the issues explored in the construction of a deal.

 

 
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