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NGP Capital Resources Company (NASDAQ:NGPC)

Q4 2008 Earnings Call Transcript

March 12, 2009 11:00 am ET

Executives

John Homier – President & CEO

Steve Gardner – CFO

Kelly Plato – SVP

Analysts

Vernon Plack – BB&T Capital Markets

Pavel Molchanov – Raymond James

Greg Mason – Stifel Nicolaus

George Gaspar – Robert Baird

Bob Martin

Dan McCullen [ph] – NAM [ph]

Operator

Ladies and gentlemen, welcome to your NGP Capital Resources Company’s fourth quarter 2008 earnings call. At this time, all lines are in a listen-only mode, with a Q&A session to follow. As a reminder, this conversation is being recorded. And now, I would like to turn the conference over to your host, NGPC President and CEO, Mr. John Homier. Please go ahead, sir.

John Homier

Great. Thanks, Dustin. Good morning, everyone. And thank you for joining us today on this call to discuss our results for 2008. With me on the call today is Steve Gardner, our Chief Financial Officer; and, Kelly Plato, our Senior Vice President, who heads our investment team.

After my opening remarks, Steve is going to begin by summarizing our financial results for 2008. Following Steve, I’d like to review with you our business model, and then provide some thoughts on the current credits and commodity markets, and how we see the current environment impacting our business. I’ll conclude my part of the presentation with a discussion of our portfolio company risk evaluation system and our current overall valuation of our portfolio. Kelly will then provide some more specific detail on the portfolio. After that, the three of us will answer any questions that you may have.

Let me begin by saying that NGPC completed another record year in 2008 with respect to taxable income and dividends, and that we remain positioned to weather the current downturn in the economy in the energy markets. Our dividend for the year was $1.61 per common share, up from $1.44 per common share in 2007. During the year, we funded targeted investments of $113.1 million. $62.8 million of that was in de novo investments, and $50.3 million was in existing portfolio companies.

As of the end of the year, our funded targeted investments totaled $294 million, having a net asset value of $244 million. Our total committed and available for funding was approximately $365 million.

Our earnings release was distributed this morning before the market opened. Those who did not receive a copy of the release can call us or can download the release from our Web site at www.ngpcrc.com. Also, for anyone wishing to listen to a recording of our prepared comments today, we will have a replay available by phone through next Thursday. The call will also be available through a link on the Investor Relations page of our Web site.

I’d like to remind everyone that at this point that our remarks today may include comments, which could be considered forward-looking statements. And such statements are subject to many factors that could cause actual results to differ materially from our expectations as expressed in those forward-looking statements. Those factors are described in more detail in our SEC filings and I will refer you to our Web site or to the SEC Web site to review those filings. We undertake no obligation to publicly update or revise any forward-looking statements. With that, I’ll turn the call over to Steve.

Steve Gardner

Thanks, John, and good morning, everybody. In 2008, we had realizations associated with two of our portfolio companies Resaca and Rubicon, which we described in detail in our third quarter earnings call. In total, for the year, we had realized capital gains after provision for taxes of $14.8 million or $0.68 per share. Our net investment income for the year was $23.6 million or $1.09 per share.

We recorded unrealized depreciation for several of our portfolio investments at the end of 2008. In total, the unrealized depreciation amounted to $51.6 million or $2.39 per share. John and Kelly will discuss this unrealized depreciation in greater detail later in the call.

As of the end of the year, we assessed that the fair value of our investments in portfolio companies in total is $244 million. Resulting in a net asset value of $266 million or $12.29 per common share. This compares to a $250 million net asset value or $14.30 per common share at the end of 2007.

As of December 31st, 2008, the weighted average yield, excluding capital gains on our targeted investment portfolio, was 9.1%. Detailed results for the year are in the earnings release and also in our 10-K, which we would expect to file later this week. In December, our Board declared a dividend of $0.41 per share for the fourth quarter, giving us a total dividend for 2008 of $1.61 per share. And as we announced this morning, our Board has declared a dividend of $0.20 per share for the first quarter of 2009.

I’d like to comment on our liquidity position. As of today, the company has no outstanding borrowings under its investment facility, which leaves us with $87.5 million available. So the only outstanding indebtedness of the company is the $75 million balance under the Treasury facility, which matures in August of this year and is fully secured by cash or Treasury Bills.

As the market conditions improve, we plan to seek to increase the company’s commitment under this investment facility and we’ll also look for other options to raise debt capital. If we see improved investment opportunities as we expect or if a special situation presents itself and the market is receptive, we may also seek to raise additional equity capital.

I’ll be happy to answer any questions you might have about the financial performance and other items after the call. And for now, I’ll turn it back to John.

John Homier

Okay. Thanks, Steve. Well, as everyone knows, the market sell off has been brutal. What I’d like to do in this section of our remarks is to provide some sense of the long term staying power and earning power of our firm.

As you know, NGPC is largely an asset based lender to companies that operate in the energy industry. Generally, our borrowers own directly and develop, and produce oil, natural gas, coal, and other fundamental energy products. In a few instances, they used our hard assets to provide services directly to companies that produce these natural resources.

Even in light of the recent dramatic declines, the forward prices for oil and natural gas continue to be at historically strong levels and are reflective of the price signals needed to ultimately replace and expand energy production. At $60 a barrel and $6 per MMBtu, we believe that the market remains tight for the long run.

Energy production requires constant and substantial investment to maintain and expand capacity to meet the needs of the growing world population and long term expansion TDP [ph]. The resources that the industry has to exploit today are more costly than at any time in history. Because of this, we believe that the demand for capital for the energy industry will remain strong into the foreseeable future. And this of course is where we play, providing mezzanine capital to small cap companies and structured applications in the energy industry to help acquire and develop energy assets, accelerate growth, and create value.

Substantially, all of our investments are either secured by our borrower’s assets or are otherwise at the upper level of our borrower’s capital structure. Today, 85% of our targeted investments are at the top level of our borrower’s capital structures, with no securities senior to ours. These investments are either first liened, or if not secured in a traditional sense, are either direct ownership interests or have limitations on capital senior to us. The remaining 15% of our investments are in a junior position vis-à-vis other senior lenders. Of those, approximately 89% are secured in a second lien position.

As you know, we look to make engineering based development oriented investments in the energy industry that are not purely price, technology, or exploration oriented. We invest with experienced management teams who we believe bring a knowledge edge to the transaction, regional, technical, or transactional. We structure our transactions for the particulars of the deal, and seek an appropriate total return for the risk that we believe we undertake.

For de novo transactions, we continued to screen approximately 30 deals to do one. We feel that this combination of assets, security, diligence, structure, and appropriate pricing provides a good risk reward for our stockholders. In the current economic environment, we look forward to continuing strong demand for the type of capital that we provide to the energy industry. We believe the current economic downturn and broad contraction of capital availability is creating a fertile environment for new investments and should present excellent opportunities for long term value creation for our stockholders.

As many of you know, prior to mid-2008, we had seen tightening credit spreads due to readily available capital in our target energy market. Over that time, there were many transactions that we looked at where we felt the return being offered was inappropriate to the risk, and so declined to invest.

One of the impacts of the current credit environment is that we now see capital leaving the energy sector in general, and our competitive space in particular. Senior banks are restricting credit – hedge funds and other generalist investors are also withdrawing funds from the space, evidenced by the significant increase in yields for high yield bonds to the range of between low teens to over 20%. And significantly, several traditional energy mezzanine competitors are reported to be on the sidelines or winding down operations.

We believe that the realignment, such as this in the energy mezzanine finance space, should ultimately result in many good risk return opportunities for NGPC. These investment opportunities include our traditional top to bottom mezzanine investments, traditional subordinated debt investments, and structured financial applications for larger companies. We believe that additional opportunities in all three of these areas will arise as banks and other financing forces reduce borrowing bases or otherwise reduce loan commitments and availability to energy companies.

The widening of credit spreads also presents opportunities for attractive purchases of second lien and high yield securities in the secondary market. Additionally, the potential exists for purchase of portfolios or parts of portfolios of other mezzanine investors who are exiting the space as a result of their own individual circumstances.

Having said that, another impact of the current credit environment for NGPC is that the capital available to us through the debt and equity markets is also clearly restricted at the present time. However, with the entire amount of our investment facility available to draw and funds that will become available from scheduled repayments of existing investments, we anticipate having about $100 million available to fund new investments throughout this year. While not unlimited, this is significant dry powder that we intend to utilize in the best and most appropriate risk reward opportunities within the energy sector. And as Steve has said, we will continue to explore all avenues for raising additional capital.

In spite of, and in many cases because of the recent declines in oil and natural gas prices, we expect to see many opportunities for the types of investments that we make. Potential client companies now have a greater need than at any time in the past 18 to 24 months for external funding to help them acquire and develop projects. Our base underwriting price cases for oil and natural gas remain in the range of $60 a barrel and $6 per MMBtu over the long run with lower prices prevailing in the near term.

In making investment decisions, we also look at the sensitivities of our investments to prices lower than that. Even though some of our investments may have stress in the current environment, we believe that they generally have cost structures that should tolerate it. Many of our current clients are benefiting from hedges that were implemented in much higher price regimes. Kelly will discuss our portfolio company hedge positions later in the call.

That said, lower commodity prices may aggravate the situations of certain investments that were performing below planned and necessitate longer term strategies for those investments. While some restructuring of our existing investments may be required subject to general economic and commodity market conditions, we do not currently foresee significant long term deterioration in the existing portfolio.

Additionally, lower commodity prices may affect the timing and level of realizations and capital gains for our existing portfolio companies. Given the volatility and uncertainty currently present in the markets, we have limited visibility at this time on potential capital gains realizations during 2009.

To summarize, the current credit environment and the recent declines in oil and natural gas commodity prices should present good long term investment opportunities for NGPC while not unduly punishing our existing portfolio, although these factors will likely extend the time frame of our capital gains realizations. We expect to continue to invest in this market and to do in a measured and deliberate pace.

Turning now to the status of our current portfolio, as you know, virtually all of our investments are in negotiated, often illiquid, securities of energy companies. While we maintain a system – accordingly, we maintain a system to evaluate the credit quality of these investments. While incorporating quantitative analysis, this system is a qualitative assessment. The system is intended to reflect the overall, long term performance of a portfolio company’s business, collateral coverage of an investment, and other relevant factors.

Based on this system, as of December 31, 2008, our investments in portfolio companies are generally performing satisfactorily, though not without some stress in the near term as a consequence of the general economic downturn and associated weakness in the energy markets. But as I said before, we believe that our portfolio companies generally have cost structures that should tolerate this.

Of the 22 rated investments in 19 portfolio companies, compared to the prior quarter end, one improved in rating, six declined in rating, 14 retained the same rating, and one new investment was not previously rated. 11 investments at $136.7 million or approximately 40% of the $294.4 million in targeted investments on a cost basis are carried on our watch list due to slower than expected development of the assets supporting the investments, deterioration in asset coverage, or the downturn in general economic and commodity market conditions. Investments in three of our portfolio companies, totaling $44 million or 15% of our targeted investments, are currently carried as non-accrual.

Based on cost, the distribution of our ratings in our risk evaluation system that the highest quality investment rate one are as follows. RES 1, we have two investments for approximately $1 million. At RES 2, we have one investment for approximately $37 million. We have four investments for approximately $76 million at RES 3. At RES 4, we have four investments for approximately $40 million. And at RES 5, we have seven investments for approximately $85 million. And at RES 6, we have four investments for approximately $57 million. No investments are rated seven.

The distribution gives an average rating, on a dollar weighted basis, of 3.9 at the end of 2008. For reference, our weighted average rating was 3.6 at the end of third quarter of 2008 and 3.6 at the end of 2007. In summary, we believe our portfolio remains sound with good potential for appropriate long term risk adjusted returns.

As a consequence of the general economic downturn and associated weakness in the energy markets, we recorded, as Steve said, unrealized depreciation for several of our portfolio investments at the end of 2008. While we believe these types of investments have good, long run prospects for recovery and total return, we may not be able to fully realize those returns in today’s market.

As of the end of the year, we assessed that in the aggregate, the fair value of our investments in portfolio companies is $244 million, resulting in net asset value of $266 million or $12.29 per common share. This compares to net asset value of $250 million or $14.30 per common share at the end of 2007.

The combined decrease in targeted portfolio and hedge position fair value of $51.6 million, a $59 million decrease in the value of targeted portfolio or corporate bonds offset by a $7.4 million increase in the value of our hedge position, is a result of a combination of adjustments. In our estimation, approximately 20% of the change is due to changes in the current market values of individual traded securities. Another 20% is due to changes in the estimated current market yields required for comparable securities. Approximately 10% is due to changes in the current market values of commodities. Approximately 35% is due to changes in the estimated current market values of underlying assets. And approximately 15% is due to the reversal of unrealized gain upon realizations for Rubicon and Resaca.

With that, Kelly will now provide some more specific color on our watch listed investments.

Kelly Plato

As John described, our watch list consists of investments that we rate five or higher. Those are the investments that for various reasons are not performing as expected. At the time of our last earnings call our watch list included six portfolio companies. And since the last call, we’ve added two – two portfolio companies to the watch list, Alden Resources and Nighthawk Transport, LP.

I’ll first discuss our investment in Formidable, LLC, which is a Utah based oil and gas production company with operations in the Powder River and Uinta basins. With a cost of $37.3 million, it is our largest watch list investment. And as of December 31 ’08, we estimate the fair value as approximately $22.5 million. This results in unrealized depreciation of $14.8 million or $0.68 per share. The decline in value in Formidable is primarily attributed to poor execution of the development plan and the current market pressure on Rocky Mountain natural gas assets. Although Formidable has experienced a number of setbacks in its efforts to develop its only property, the company has assembled a significant acreage position in the Powder River Basin, and we believe these properties has substantial gas in place and resource potential.

You may recall that Formidable’s asset consists of all oil and gas lease hold interests in Wyoming, Utah, and Montana, and most of acreage is undeveloped. But Formidable has also made certain improvements. A number of wells has been and drilled and (inaudible) infrastructure in Wyoming. For purposes of determining fair value, we’ve attributed minimal value to the acreage in Utah and Montana, and have attributed minimal value to the infrastructure that Formidable has developed in Wyoming. Essentially, our estimated fair value is based on the value of the company’s Wyoming acreage.

Since our initial investment, we have invested approximately $37.3 million that has been used by Formidable to drill approximately 60 cold bed methane wells in the Powder River Basin. Furthermore, the company’s principals have invested over $45 million in equity in order to acquire the acreage, drill 33 wells, and to support the company’s operations. Formidable has assembled a significant acreage position, approximately 89,000 net acres in Utah and Wyoming, and has made certain investment a – certain investments in infrastructure in Wyoming, and has maintained a small amount of gas production.

However, in its efforts to develop the properties, the company has experienced many operational challenges, some in the company’s control and others that were not. But despite these – these setbacks, the company’s 3P reserves, those proved and probable, and possible reserves are – in our estimation, approximately 170 Bcf of natural gas. Formidable has a good asset base, but it’s an asset base that requires capital, still has an element of risk, and requires a sound development plan and solid execution of the plan. That’s what we’re working to achieve.

At the time of our last earnings call, we reported that we have entered into a full managed agreement with Formidable’s principals. The full managed agreement provided the principals the time to complete the transaction that will repair a loan, and they weren’t able to complete such a transaction. And we are now working with the principals to take control of the properties. After which, we plan to engage in new operator and we’ll explore our alternatives, such as the sale of some or all of the assets, or further development of the properties the new operator. We do believe on long term value of these assets. And provided that we can execute the development plan, we may decide to further development is the best way to maximize the value.

The next watch list company is DeanLake Operator LLC. Since our initial investment in DeanLake, we have invested approximately$13.9 million that was used to acquire oil and natural gas properties in Montgomery County, Texas. We reported in our last earnings call that we restructured the company in July ’08, exchanging our debt and warrants for a controlling membership interest in the company. At this point, we have assumed operations of the company. And after assuming control, we have prepared the company for sale and marketed the assets to a number of parties. However, to date, we have not been able to reach an acceptable agreement.

As of year end, our cost was approximately $13.9 million, and we estimate the fair value to be $10 million. This represents unrealized depreciation of $3.9 million or $0.18 per share. The declining value is primarily due to market conditions and we’ve been working hard to enhance the value of DeanLake’s assets. Since the restructuring, we have contacted with one of our other portfolios, TierraMar Energy, to operate DeanLake’s assets. Since TierraMar has assumed operations, they’ve made significant improvements to the company’s operations in the form of cost reductions and field improvements that have resulted in increased production and cash flow.

The company’s cash flow remains sufficient to cover operations and provide for some small capital expenditures. And currently, we’re preparing to implement a re-completion program and are considering a proposal from another operator who would like to conduct a 3D seismic survey over our acreage.

Another restructured and improvement portfolio company on the watch list is TierraMar Energy, LP, an oil and gas producer with operations in (inaudible) County, Texas. We made our initial investment in TierraMar in 2005. And early on, we had better than expected success. TierraMar then experienced some operational satisfaction, and we restructured our debt investment into our control equity position. Since the restructuring, we’ve drilled ten successful wells and had significantly increased reserves. TierraMar’s production cash flow and reserves have all improved, but we’re keeping on the watch list for now because the new wells are still early in their lives and we still have development work to do in the field. TierraMar’s cash flow is sufficient to fund these operations and generate free cash flow. But we’ve continued to carry it as a none income producing investment.

Nighthawk Transport, LP is an oil fill service provider that specializes in water handling and production services for the E&P industry. (inaudible) investment in Nighthawk’s thermal and VN06 as part of a group of institutional investors. At year end 2008, our total cross was approximately $15.2 million, and we estimate fair value to be approximately $7 million, representing an unrealized depreciation of $5.2 million or $0.24 per share. Nighthawk is a well managed service provider and has performed well since our initial investment. However, the near term outlook for oil filled service company is as challenging.

Nighthawk had record financial performance 2008, but has seen utilization slowed during December ’08 and January of this year, and is experiencing contracting margins. Nighthawk recently admitted its senior credit facility and we amended the amortization requirements under our B loan. And these amendments provide Nighthawk with the liquidity to withstand this current market downturn. But still, even though the amendments require a meaningful de-leveraging there in ’09, we believe that Nighthawk will be able to weather the current market, but we’re also preparing for the worst case.

Alden Resources is the second coming that’s new to the watch list. Alden is a producer of high quality coal that is used primarily in the manufacture of silicon metal. We made our recent investment in Alden in January of 2007, and our cost is approximately $36.4 million as of December 31, 2008. We estimate the fair value of our total investment in Alden to be $35.8 million, resulting in unrealized depreciation in the amount of $700,000. That unrealized depreciation comes from the combined valuation of our secured notes and our royalty interest. The fair value of our notes has declined by $5.5 million, primarily because of increasing credit spreads for comparable debt securities. We’ve also recorded unrealized appreciation in the amount of $4.8 million . The increased value of the royalty interest is primarily driven by increased production levels and the resulting income attributable to the royalty interest.

We believe that Alden represents a good long term value proposition, but it faces short term challenges. Alden’s operations are relatively concentrated, and any problems with equipment, weather, or transportation stretches the company’s working capital. Additionally, the concentration of production and the small number of mines makes it challenging at times to consistently supply the company’s key customers with the amount of coal that they desire.

The other major challenge that Alden faces is seasonal demand. Much of Alden’s business is in the export market. And during the winter months, it’s not possible to ship coal to several of its key customers. We are currently considering a number of alternatives to expand Alden’s mining operations in an effort to mitigate the concentration of production risks and to optimize Alden’s product risks to dampen the impact of the seasonal demand for especially coal.

The next company on the watch list is BioEnergy International. BioEnergy is a developer of bio-based chemicals and fuels produced from renewable feed stocks. The company is in a very similar position than where it was at the time of our last call, performing at or near plan, but we continue to carry it on the watch list due to market conditions for alternative energy companies.

We made our investment in BioEnergy last year as a part of a group event institutional investors. We have $5 million out of a $35 million Second Lien loan issue, and we hold $10 million of a $61 million senior subordinated loan issue. BioEnergy currently has two commercial projects, one that’s in the development phase and by-products that are in the early stages of research. Its commercial projects include a renewable biochemical D-minus lactic acid, which is used in the manufacture of plastics. And the D-minus lactic acid process has been licensed to a European chemical manufacturer.

The second aspect of BioEnergy’s business plan involves renewable fuels. As reported on the last earnings call, BioEnergy is in the process of constructing a 108 million gallon per year ethanol plant in Clearville County, Pennsylvania, which is expected to be completed late this year. Recently, the market has been particularly difficult for conventional ethanol producers. And is the reason we’ve included BioEnergy on the watch list.

However, we think that BioEnergy differentiate itself from merchant ethanol producers in several ways. And most significantly, is that the production from its Clearville plant is fully contracted for five years under an optic agreement that fully hedges our exposures to fluctuations in the prices of corn, natural gas, and ethanol.

And secondly, the demand for BioEnergy’s special chemicals in independent of the ethanol market. The Clearville plant construction is substantially on time and on budget and development of BioEnergy’s special chemical products has exceeded our expectations. While we recognize this as a tough time for producers of renewable fuels, BioEnergy is a little different from merchant producers and we’re encouraged by its progress to date.

BSR Loco Bio is an independent oil gas producer with operations in East Texas and it is our localism investment that has been restructured and is improving. We’ve invested approximately $4 million in Loco to date. And in 2008, BSR Loco sold a portion of its assets to a publicly traded E company.

In consideration of the sale, BSR Loco received $1.3 million in cash, which was used to reduce the unpaid balance of our debt. At year end, the outstanding balance under our note was $2.9 million and we estimate fair value to be approximately $1.5 million. At additional consideration, Loco received the carried interest in three wells to be drilled by the buyer. These wells have been drilled and two of the wells are currently producing at attractive rates. The third well is a well that’s commercially successful, although much smaller than the other two wells. We think that there’s value to be had and move the value and we’re working with the management to optimize that value at present.

Chroma Energy is the last company on the watch list to discuss. Chroma was recapitalized in 2008 in connection with an acquisition of producing properties and is demonstrating improved results. Chroma is an oil and gas producer with operations in Texas and in the shallow waters of the Gulf of Mexico.

Our investment in Chroma is relatively small in connection with the other equity investors of the company. Our total cost is approximately $4 million out of $111 million of total equity invested in the company. We estimate the fair value of our investment to be $1 million at the end of ’08. Still going through its recapitalization and the property acquisition, Chroma has reduced its debt by almost 20% and has maintained stable cash flow in production.

In summary, while we reported significant unrealized depreciation this quarter and we face some challenges, all of the Westwood companies have potential for recovery and to generate acceptable returns. Also, with the exception of Formidable, all of the watch list companies are currently generating cash flow that is sufficient to fund our operations and should be able to withstand the market downturn.

The last item I’d like to briefly address is commodity price risk management. As we have discussed before, we attempt to limit our exposure to fluctuations in commodity’s prices by hedging usually at the portfolio of the company level. And given the uncertainty and the volatility in today’s market, we’re spending a lot of time with our portfolio of companies discussing hedging strategy.

At present, on a weighted average basis, approximately 51% of our portfolio of company’s production is hedge through 2010 at weighted average prices of approximately $68 per barrel and approximately $6.50 per MMBtu.

Although a long term view of commodity prices is very positive, our outlook for the short term is more bearish. In fact, we anticipate solid oil and natural gas prices over the next 18 to 24 months. And we believe that the future’s market at current level provides us an opportunity to protect against further price deterioration. And we’re working with our portfolio of companies to adjust our hedge positions accordingly.

So in conclusion, we feel that overall, NGPC is well positioned for stability and opportunistic growth in this turbulent market and economy. We feel that any negative impact of the current economic downturn on our existing portfolio is manageable. But at the same time, our investment capital and low leverage present opportunities for new investments having the potential to provide good risk adjusted returns.

That concludes our prepared comments. I’ll now turn the call back over to Dustin to facilitate the Q&A. Steve, Kelly, and I will be fielding your questions.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator instructions) We’ll go first to Vernon Plack with BB&T Capital Markets.

Vernon Plack – BB&T Capital Markets

Thanks very much. And John, could you help me with the amount of activity that occurred in the fourth quarter in terms of additional investments as well as any repayments or exits?

John Homier

The only new investment that we made in the fourth quarter was an investment in a company called Black Pool.

Vernon Plack – BB&T Capital Markets

Black Pool. Okay.

John Homier

Black Pool Energy. They are an oil and gas producer with properties onshore in Louisiana and offshore at the waters of Texas. We made a commitment of $13 million – $13.5 million to Black Pool to fund capital expenditures for well completions and facilities. Since our investment, Black Pool has drilled four wells or five wells and is – we don’t have any of the wells on production right now. But we’ve had some pretty good results so far and we got some very encouraging logs on the wells. And we’re working on completions of facilities right now.

Vernon Plack – BB&T Capital Markets

Okay. So one new investment in the fourth quarter. What about any access or repayments that you had in the fourth quarter?

Steve Gardner

Vernon, this is Steve. We had a total repayment of $14 million and funding on existing credits about $9 million.

Vernon Plack – BB&T Capital Markets

Okay. All right. Great. And looking at this earnings release versus last quarter’s earnings release, last quarter was mentioned at the weighted average yield on target portfolio investments was 12.41%. This time around, at least on the fourth quarter ended 12/31, at 9.1%

John Homier

That’s right.

Vernon Plack – BB&T Capital Markets

Could you help explain the difference in those two? Is it non-accrual related or–?

John Homier

It’s non-accrual because the three companies that we have are non-accrual, Chroma, and BSR Loco, and Formidable have been on non-accrual since early 2008. The primary difference is the ATP’s limited term royalty.

Vernon Plack – BB&T Capital Markets

Okay.

John Homier

Ike knocked out the discovery gas gathering system out in the Gulf. And ATP’s production from September through really early February was down to a very modest level because it couldn’t produce gas and the associated oil was shoving as well. So Kelly is right, if they’re back at full production at this point.

Kelly Plato

They’re back up at full production and they’re working on the properties as well trying to increase production. But it was – there’s a solid six months that we were down.

Vernon Plack – BB&T Capital Markets

So that will imply that the weighted average yield should go up.

John Homier

Yes. That’s correct and all other things because we had very nominal income as of the end of the year for ATP. And as compared to in the third quarter, when ATP came on the gang busters and oil is at $120 a barrel. It was at a much higher level than at the fourth quarter.

Vernon Plack – BB&T Capital Markets

Okay. And I think you answered my last question, at least for right now. And that is regarding non-accruals, but were there any new adds to non-accruals?

John Homier

No. Vernon, the last time we added a credit to – the Chrome has been on non-accrual since, I believe, at least the beginning of 2008, as is BSR Loco. And those are both very nominal in size. The big one is Formidable, and it’s been on non-accrual since April 1 of last year.

Vernon Plack – BB&T Capital Markets

Thank you.

John Homier

Sure, Vernon.

Operator

(Operator instructions) We’ll go next to Pavel Molchanov with Raymond James.

Pavel Molchanov – Raymond James

Hey, guys. Two quick questions. First, just to clarify Formidable in February and Nighthawk in March were those included in the write down as of Q4?

John Homier

Yes. Formidable was written down with $15.8 million, I believe and Nighthawk a total of $5.2 million.

Pavel Molchanov – Raymond James

So when we think about Q1, should we assume further depreciation for at least Formidable?

John Homier

At this point, I don’t think we’ve seen that. We took a very – I think very conservative approach to valuation. And nothing really has changed since the end of the year that would cause us to believe that the values have deteriorated.

Pavel Molchanov – Raymond James

Okay.

Kelly Plato

As in any changes in the marketplace.

Pavel Molchanov – Raymond James

Understood. And then follow-up on – just thinking generally about your dividend policy, $0.20 a quarter, should we assume that going forward at least Q2 and Q3 relatively flat or how should we think about that?

John Homier

Well, Pavel, as you know, we don’t provide guidance. But as we’ve said, starting last December when we had our fourth quarter dividend, at the moment, we don’t see any capital realizations. And so we expect it will be distributed in net investment income. At this point, we haven’t closed out the first quarter, but we do expect that we’ll – we’ll cover the first quarter dividend we just declared with net investment income. I would suggest you look back in past years in terms of what the net investment income has been on a first year basis and take it from there.

Pavel Molchanov – Raymond James

Okay. Very good. Thank you.

John Homier

You’re welcome.

Operator

The next to Greg Mason with Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Good morning. Can you talk a little bit about your commodity derivative income of $2.6 million in the quarter and how we should look at that on an ongoing basis?

John Homier

Sure, Greg. This is all associated with our investment in ATP limited term royalty, where we have direct exposure to oil and gas prices. Originally, we hedged a 100% of the production on the oil. It was at two levels. In ’08, it was principally at $101, I believe, Kelly? And then ’09 at – part of ’09, was in $101 and part at $85. The gas was down at $10 throughout the dependency of the estimated production.

What has happened, Greg, since they’ve been offline is that it’s pushed the production stream into the future somewhat. We’re offline or to change it offline for a bit. And so what we’re looking at right now is laying on some additional hedges. As soon as ATP’s reviving some production forecast and once we get a good handle on that we will likely go out and extend the hedges somewhat.

Greg Mason – Stifel Nicolaus

So the current hedges only go through 2009?

John Homier

Some actually go to the early part of 2010. The original–

Kelly Plato

There’s a small position that gets into 2010, but it’s not very big.

Greg Mason – Stifel Nicolaus

And had you previously expected that it would be 100 –your portion would be 100% depleted by then?

Steve Gardner

Yes.

John Homier

We matched the hedge contracts with the expected production promo.

Greg Mason – Stifel Nicolaus

Okay. And any estimation at this point of how far out you’ve been pushed out?

Kelly Plato

We think we’ve probably been pushed out three or four months. We’re waiting to see what the new numbers from ATP come out to be. They actually believe that they’re going to get production up a little higher and it might be closer to what we expected originally. But we haven’t finalized those numbers yet.

Greg Mason – Stifel Nicolaus

And then can you talk about – you said you had about $100 million available to invest. You got, I believe, $87 million left on your credit facility. Do you expect of the $100 million that you can draw down the full amount on your credit facility? Or is that a smaller portion of the credit facility and more repayment?

John Homier

It would be at any – today, for example we would still have to reserve $35 million to $40 million of the line credit for unfunded commitments on existing deals. We expect those to decline – the under funding commitments to decline over time. And also the balance would be repayments on existing transactions. Principally, each month that both the ABC net profit center and our net profit center sends the ATP royalty. Those are reducing principles on a monthly basis. And we expect ATP to pick up again out of their producing. So it’s a combination of both, but as – that’s why we say through the year, we expect we’ll be able to put out $100 million. Today, we would probably be able to put out a half of it if we wanted to write a check tomorrow.

Greg Mason – Stifel Nicolaus

Great. Are there any company issues, minimum net worth, or any types of potential problems with that facility or the Treasury facility?

Steve Gardner

No. We don’t have a minimum network covenant per se. What we have is debt incurrence, a covenant, which is – the debt net asset value has to be 2.25 to 1 to debt. And with $87.5 million that would show – I’ll do a little math here right quick. Yes. If we maintain a net asset value of $200 million then the full amount of the $87.5 million will be available. But there aren’t covenant triggers that if we are drawn at some point, other than the reduction and net asset value that will trigger repayment.

Greg Mason – Stifel Nicolaus

Great. Thank you, gentlemen.

Steve Gardner

Sure, Greg. Thank you.

Operator

We have a follow-up from Vernon Plack with BB&T Capital Markets.

Vernon Plack – BB&T Capital Markets

Yes. Steve, could you tell me are you – what’s the estimated stall over income that you are carrying into ’09.

Steve Gardner

We have roughly, some of this is – taxable income is based on estimate and we have some capital gains last year. I would say we have between $0.20 and $0.25 of carry over depending on how some tax resolutions come out. About two thirds of that will be capital gains.

Vernon Plack – BB&T Capital Markets

Okay. All right. And I just want to make sure that I at least understanding this correctly and you haven’t specifically stated, but just in terms of – what should we be thinking in terms of net portfolio growths? It appears that there are some opportunities out there and that we could actually see the portfolio growth throughout the year. Is that correct?

John Homier

We believe so. There’s more and more everyday, and more and more of updates to put my– we’re still trying to be very careful about risks and entry points. And the market’s pretty fluid right now.

Vernon Plack – BB&T Capital Markets

Right.

John Homier

So we do expect to put some money out this year. But it probably will be a lumpy phase.

Vernon Plack – BB&T Capital Markets

Okay. All right. Great. Thank you.

Operator

Another question will go next to George Gaspar with Robert Baird.

George Gaspar – Robert Baird

Yes. Thank you. Good morning to everyone.

John Homier

Hi, George.

George Gaspar – Robert Baird

First question would be on – do you have any kind of evaluation that would show you the data related to expected 2009 expenditures within your portfolio companies on their exploration and development expenditure trends versus a year ago and 2007? Do you ever keep track of that to get a sense of what kind of decline there is among the operating companies that you own investments in?

Kelly Plato

We do, but we don’t have those numbers at our finger tips. But in general, we have slowed down – the portfolio companies have slowed down quite a bit.

Steve Gardner

In terms of the point capital.

Kelly Plato

In terms of the point capital. We’re all pretty defensive right now and trying to make sure that our core structures are in a position or to maintain business through this downturn with the exception of Black Pool. We did that investment in the fourth quarter of the late and we took a couple of months getting prepared to start the capital program. And they got a pretty good phase over the last six or eight weeks. Other than that, we’re being pretty deliberate on where we deploy capital.

John Homier

And George, maybe this is part of your question too. Yes, we have good visibility on where our portfolio companies are going to spend money. Part of the standard documentation we have is for continuous updating of budgets for both operations and capital expenditures. And as we are a significant provider of that capital, those budgets have to be approved by us. So we have good visibility on where things are headed through the course of the year. And that then comes back to what Kelly said, everything is being relative to defensive right now.

George Gaspar – Robert Baird

Okay. Thank you. I got an additional question here on the $100 million that was asked about. Before, you indicated the availability to invest, but out of that there’s, I believe you indicated $45 million to $50 million that has been allocated for unfunded commitments that are there yet. In terms of that particular portion, are there variables on those unfunded commitments that, if in fact those funds are called out from you, that you have some variables to keep additional interest in those particular entities on either an interest earn basis or an equity basis and stock?

John Homier

George, not in terms of it, the primary unfunded commitments are with Osaka investment and with Anadarko. And in those circumstances, if they needed to draw more fund it wouldn’t trigger a renegotiation for a high level of interest.

Frankly, in the Anadarko credit, there is about $14 million of unused capacity there. They told us that they don’t intend to use anymore. And we’re beyond the point at which they have a firm call on it so we have some choice in the matter as to where to bond.

In terms of Osaka, I think we have roughly $32 million or $33 million funded on a $60 million facility. So that’s a big piece, as well. We’re in the process of working with the company in terms of re-determining the volume based and they’re also looking at some other capital solutions. So in those cases, no, there’s not upgraded return capacity.

What Kelly mentioned that the Nighthawk and we’ve mentioned ourselves with them. That the Nighthawk investment – that the facilities we have there with the lender group and their restructure. And in that case, we went from a coupon of 15% to a coupon of 21% with the additional 6% being pickable [ph] or payable in kind in the company’s option.

So that was a step up in terms of expected return. And we also increased our warrant position from roughly 2.5% to about just under 7%. So there are opportunities when companies have either maturities or amortization requirements where their restructuring opportunities, so to speak, and they typically – in this environment, would result in better pay or additional upside for us.

George Gaspar – Robert Baird

Okay. And if I could push one additional for learning curve purposes and see how you respond on this.

John Homier

Sure.

George Gaspar – Robert Baird

I call it the measurement of opportunity on a per barrel basis. How do you view the cost expectation or what the number would be if you were going in to an investment to date with the expectation of where cost is or where the value is on a per barrel basis when you go to make an investment? How would that compare to a year ago? What kind of a percentage decline would there be when you would look at that kind of formulization? Or maybe I’m asking something that doesn’t really have an answer?

Steve Gardner

That’s a difficult question to answer, but it might get a proxy for it by looking at the publicly traded E&P companies. And–

John Homier

Frankly, George, our underwriting process evens when walls of 150 – well, weren’t quite there. But during all of 2008, I think our long term oil price was at $70 in gas.

Steve Gardner

$60.

John Homier

$60 to $65. And we tempered to near term, but we never really entered into an investment with a current strip or a NYMEX strip expectation on prices. In fact, there’s answer to the extent that you can hedge it like in prices, but it’s not driven the upside, so to speak.

Steve Gardner

And we don’t make investment on a basis of dollars per daily barrel or dollars per barrel in the ground, as it were. A lot of times those statistics are reported, but they’re after action numbers. We’re MPV and IRI guys and we look at this kind of cash flow as being our primary consideration in making an investment. And after you’ve done that, you might be able to calculate the dollars per daily barrel or dollars per well on the ground number, but that wasn’t the metric that was used in making an investment.

And, as Steve said, our long term price deck has remained very stable because we have a loan from view, which I’ve talked about in the comments. We do lag the rear end of that curve to give consideration to the curve. When the curve’s up, we’ll come part of the way up to meet it. When the curve’s down, we’ll come down to meet it in the short run. But long term and this would be an entire entirely – another entire lecture that we could get into but the long term valuation of oil and gas and for the economy needs to be what kind of price signals it needs. But suffice to say that long term, we think 60 and 6 are good long term numbers and prices are a lot higher, we can take some advantage from the future’s curve and hedging in doing transactions. But we’re not predisposed to believe that significantly higher prices would prevail forever.

George Gaspar – Robert Baird

Okay. All right. And just summation, just congratulate you guys on the progress that you’ve made. This is, as we all know, a real tough market across the pretty broad spectrum. But for your company, the partnership, to be in a position that it is to take advantage of some of this opportunity and to see the quality of the effort that you’ve put forward. I think if you can continue to do that going forward in here, it should really pay off on the upside considered relative to the pricier stock, which is really quite surprising it’s got as small as it has, but thank you very much.

John Homier

Thank you.

Steve Gardner

You’re quite welcome. Thank you.

Operator

We have a question from Bob Martin, private investor.

Bob Martin

In my notes here, I have that you said that ATP assets were damaged in Ike, and that lack of payment hurt your weighted average yield number for the quarter. Did I have that right?

Steve Gardner

The ATP assets per se weren’t damaged. The pipeline system that they sell into was damaged and so they weren’t able to sell their gas here at that time.

Bob Martin

Okay. Can you explain how that reaction or how that event affected your weighted average yield number?

Kelly Plato

Yes. The weighted average yield is calculated as with income as of the end of the year and in this case, the income off the ATP investment is driven by this production, but the barrels produced for our account as the working [ph] owner times the price prevalent in the market that they’re selling at. And so, in the third quarter, production and prices were substantial. In the fourth quarter, production was way, way down because they were essentially shut in and so there wasn’t relatively hardly any income from ATP in December. And so, as a result, the yield on the ATP itself is somewhere around 3%, I believe. And with $20 million plus investment, it brought the average down.

Bob Martin

So I shouldn’t interpret a weighted average yield number as being that – as being you have existing loans that are going to pay back that going forward? Did I say that–?

Steve Gardner

That’s correct. It’s a little – the number itself is a snapshot of a point in time saying the income on the portfolio, for example, for the month of December as of December 31st is yielding that amount. It’s not really a measure because balances change and amounts change. It’s not really a measure of the long term, overall yield on the portfolio. For that, I will take a look at the scheduled investments and see what (inaudible) coupons are. Now, the royalty, such as ATP, is not a coupon, it’s just barrels times and NCS times price times production, so.

Kelly Plato

I don’t have those numbers handy right now, but if we type that every quarter. It would be something to track over.

Steve Gardner

Yes. On average, each quarter, it’s a pretty good range. It ranges from 8% to 9%, up to 13% over the last two, three years.

Bob Martin

Should (inaudible), I should think that equity investment returns were included in the weighted average yield number.

Steve Gardner

They’re not. The equity investments do not produce current income and–

Bob Martin

Okay. And then capital gains are–

Steve Gardner

The capital gains aren’t either. But they’re included in the denominator so that is weighted down.

John Homier

There’s no interest. Yes, they are included is the right answer. I made a mistake.

Bob Martin

But not–

Steve Gardner

Not capital gain.

Bob Martin

Not in the numerator?

Steve Gardner

Correct.

Bob Martin

Thank you.

Steve Gardner

There will be a – when we file our 10-K, which we hope to file tomorrow, there will be a chart in there that shows each category of investment and the weighted average on the yield on that type of investment as of the end of the year, which may help explain.

Operator

You have a follow up question from Greg Mason with Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Thanks you. I wanted to follow up on Vernon’s question about the spill over in debt, some cash implications. You forwarded tax benefit the last two quarters of $4.9 million and you never had a tax benefit before or provision before. What’s the driver of that and how do you realize the benefits of those deferred taxes?

John Homier

Sure, Greg. One of the drive revenues of almost entirely the realized capital gain on Rubicon, which occurred in the third quarter. And what happened is, as a BBC, we’re not able to own directly and pass through investment such as limited parking units or LLPs. A lot of companies in the oil and gas business structure themselves that way. Rubicon, in fact, is an LLC. We are a half owner of the equity there. And so, in order to be able to own these securities, we own them indirectly through what we call blocker corps or it’s a subsidiary. In this case, NGPC has holdings too, which is taxed as a corporation. That capital gain – I think the gross capital gain was around $13.5 million to $14 million for Rubicon. I believe that’s correct.

Steve Gardner

It is $14 million.

John Homier

And the initial tax provision is around about $4.5 million on that. Now, that is consolidated up to the parent. And because, in that same subsidiary, we have Rubicon, we have DeanLake, and we have TierraMar generating potential drilling costs and deductions, and completion, etcetera, which provide a shield in terms of creating a deferred tax asset. And so, essentially, the answer to your question is the subsidiary will be writing a check to the IRS for tax on the capital gains but over time, we’ll recoup that. With over time, really, principally in 2009 through the IDCs and completion. Does that help you?

Greg Mason – Stifel Nicolaus

Yes, it does. Thank you.

John Homier

Sure, Greg.

Operator

Our next is with Dan McCullen [ph] with NAM [ph].

Dan McCullen – NAM

Quick question for you, to make sure I’m understanding this correctly. If the book value is roughly $12.20, it seems like we have $7 worth of book value in Tier 5 and 6. That’s about $1.80, this is rough of assets that are non-accrual assets. So about 73% of our book value is currently on “either non-accrual or watch”. Am I missing something there?

John Homier

I think the non-accruals is assumed in the watch. So it’s not–

Dan McCullen – NAM

Okay. So I’m double counting?

Kelly Plato

Correct.

John Homier

Right. And those in the watch, the ones that had the write down something to bring them to–

Steve Gardner

Not all watches have write downs.

John Homier

No. But the ones that have lot write downs are in the watch list. And so, those – that $12.20 already takes into account the mark – the current market markdowns that we have for those particular investments.

Dan McCullen – NAM

Correct. But the remaining – of the $12.20 of book value, your non-accrual you said was roughly 15% representing three investments?

Steve Gardner

That’s correct. $44 million Formidable, Chroma, and BSR Loco.

Dan McCullen – NAM

Correct. And you’ve written those down?

Steve Gardner

Yes.

Dan McCullen – NAM

But they still represent $1.80 of the book value.

Steve Gardner

That’s correct.

Dan McCullen – NAM

Okay. Then, the Tier 5 and 6, which you said totaled $142 million, $85 million and $57 million? Are those numbers correct?

Steve Gardner

That’s correct.

Dan McCullen – NAM

Those are included in the book value.

Steve Gardner

Yes.

Dan McCullen – NAM

So that’s $7 a book value?

Steve Gardner

Right, and that $7 includes the ones that are non-accrual.

Dan McCullen – NAM

I got you.

Kelly Plato

That includes the (inaudible) $6 and then the $1.80 that you calculated.

Dan McCullen – NAM

Okay. Thank you.

Kelly Plato

You’re welcome.

Operator

Gentlemen, at this time, there appears to be no further questions.

John Homier

Well, with that, I appreciate everyone’s attendance at the call today, and we look forward to visiting with you again probably in about two months to report on our first quarter results for 2009. Thank you again for being here.

Operator

And that concludes today’s conference call. Again, thank you for your participation, and you may disconnect at this time.

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