NGP Capital Resources Company Q2 2009 Earnings Call Transcript

Aug.11.09 | About: OHA Investment (OHAI)

NGP Capital Resources Company (NGPC) Q2 2009 Earnings Call August 11, 2009 11:00 AM ET

Executives

John Homier - President and Chief Executive Officer

Stephen K. Gardner - Chief Financial Officer

Kelly Plato - Senior Vice President

Analysts

Greg Mason - Stifel Nicolaus & Company, Inc.

Jasper Birch - Fox-Pitt Kelton

Pavel Molchanov – Raymond James

Vernon Plack – BB&T Capital Markets

Operator

Ladies and gentlemen, welcome to your NGP Capital Resources Company second quarter 2009 earnings call. At this time all participants are in listen-only mode with a Q&A session to follow. (Operator Instructions)

As a reminder, this conversation is being recorded.

Now I would like to turn the conference call over to your host, NGPC President and CEO, Mr. John Homier.

John Homier

Thanks, Felicia. Good morning everyone and thank you for joining us today on this call to discuss our results for the second quarter of 2009. As usual, with me today on the call are Steve Gardner, our Chief Financial Officer and Kelly Plato, our Senior Vice President, who heads our investment team.

After my opening remarks, Steve will provide a summary of our financial performance for the second quarter and the first half of the year. He’ll also cover some important and positive subsequent events related to NGCP’s financial position. Following Steve, Kelly will provide highlights of significant portfolio activity during and subsequent to the quarter. I’ll conclude our presentation with a summary of our overall portfolio performance and investment quality and a brief discussion of our view of the current market, our business strategy, and outlook for the coming months. After that we’ll take questions from those of you who have called in.

To begin, let me tell you that we feel your company is successfully weathering the difficult general economic times. NGCP continues to generate net investment income and dividends, manage its financial leverage, and position itself for renewed growth as the economy and later as the energy industry recovers.

As we declared earlier, our dividend for the second quarter was $0.12 per common share, down from an average of $0.40 per common share last year and $0.20 per common share for the first quarter. As you will recall, we had net realized capital gains last year of $14.8 million or $0.68 per common share. However, as we have mentioned previously, we do not currently have visibility on capital gains realizations for the balance of this economic year.

Through the remainder of 2009 we expect that NGCP will continue to distribute substantially all of its taxable net investment income. Continuing our cautious approach to investing during the quarter, we funded targeted investments of only $12.8 million, all to existing portfolio companies during the quarter. As Kelly will discuss later, we also had cash repayments of $33.5 million upon retirement of two existing investments.

As a result of this activity, at the end of the quarter, out funded targeted investments totaled $274.3 million, having a net asset value of about $200 million. Our total committed and available for funding was approximately $280.5 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 website 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 Tuesday. The call will also be available through a link on our Investor Relations page of our website.

I’d like to remind everyone 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 can 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 refer you to our website or to the SEC website 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.

Stephen K. Gardner

Thanks John and good morning everybody. During the second quarter our net investment income before tax benefits was $1.5 million or $0.07 per common share. As John mentioned, our second quarter dividend was $0.12 per share. We reduced the dividend because of several factors that would impact both the second quarter net investment income as well as in some cases subsequent quarter income. First, as of May 1, we placed our Night Hawk investment on non-accrual.

As we announced in July, Night Hawk filed for bankruptcy under Chapter 7 of the bankruptcy code and is in the process of liquidating its assets. The lost interest revenue for the second quarter totaled approximately $0.5 million or $0.025 per share. Also in June, our Resaca and Crossroad investments were repaid. While the payoffs occurred late in the second quarter and had only a modest impact on net investment income, the effect of net investment income going forward would be approximately $700,000 or $0.035 per share per quarter for as long as those investments would have otherwise remained outstanding.

As we discussed previously, at current oil and natural gas prices, the cost depletion on our ATP royalty investment is greater than the revenue stream negatively impacting net investment income. In the second quarter this reduced our net investment income by approximately $1.1 million or $0.05 per share.

Finally, through the second quarter we have been working with the management of Alden, our coal portfolio company, to restructure the balance sheet to put the company on firmer footing. During these efforts we permitted the company to suspend royalty payments and thus we did not book royalty income with respect to Alden. This reduced our net investment income in the second quarter by approximately $300,000 or $0.015 per share. The good news with respect to Alden is that we completed the recap in July and we expect the royalty payments to resume.

During the quarter re recorded a modest amount of unrealized depreciation. In total our net unrealized depreciation for the quarter was $4.4 million or $0.20 per common share. John and Kelly will discuss the unrealized appreciation in greater detail later in the call. As of the end of the quarter, we assess the fair value of our investments and portfolio companies at $200 million resulting in a net asset value of $238 million or $10.99 per common share. This compares to $243 million or $11.23 per common share at the end of the first quarter 2009.

As of June 30, 2009, the weighted average yield excluding capital gains on our targeted investment portfolio was 4.09%. The primary drivers of the low weighted average yield were one, as we discussed previously, the cost depletion on our ATP limited to term royalty was greater than the income we recorded on the investment as a consequence of lower oil and natural gas prices, producing a negative yield for the June 30 calculation.

Two, the commodity hedges associated with our investment in ATP which produced substantial income in the second quarter are not reported as a targeted investment so the income is not included in the calculated weighted average yield for our targeted investment portfolio.

Three, on a cost basis, $59 million of our portfolio investments were on non-accrual as of the end of June and $38 million of our equity investments that while internally are not currently producing net investment income to NGCP.

While we do not offer specific guidance for future quarters, there are a number of things that have occurred since the end of the second quarter which bode well for our future. In July we retired the entire balance of our Treasury credit facility. The facility matures at the end of this month and we have no plans to renew it. While the cost of this facility was initially quite reasonable with the widening of spreads over the last several months, it had become much more expensive.

This retirement will remove the negative carry on maintaining the Treasury facility. As I mentioned previously we completed the recapitalization of Alden in July, relieving the company’s working capital challenges and providing for the resumption of royalty payments. Also, and Kelly will discuss this further, our investment in BRS Loca repaid at the end of July. This was a small investment where we had recorded unrealized depreciation and placed it on non-accrual in 2007. In addition to receiving our full principal amount, we also received all past due interest totaling approximately $270,000 or approximately $0.01 per share which will be booked in the third quarter. We continue to hold warrants in an overriding royalty interest in BRS Loca.

Finally as we mentioned in previous calls, we carried over in excess of $0.20 per share of undistributed income from 2008 which we expect will be substantially distributed during 2009. A brief comment on our liquidity position. As it stands today, we have repaid our balance on the investment credit facility in July and so we currently have the full $87.5 million facility as well as $19 million in cash on hand available for new investment. We are also currently working with our banks to increase the total commitments and to extend the maturity of the investment credit facility.

As always, detailed results for the quarter are in the earnings release and also in our 10-Q which we filed on Friday. We will be happy to answer any questions you might have about our financial performance after the call but for now I’ll turn it over to Kelly.

Kelly Plato

Thanks Steve. Since our last earnings call we’ve had several significant changes in the portfolio related primarily to our investments in Resaca, Crossroads, BSR Loco, Night Hawk, and Alden.

In June, Resaca entered into a $35 million credit facility that was arranged by CIT Energy. CIT committed to hold $25 million and we committed to hold the remaining $10 million of the new facility and the proceeds were used to repay the outstanding balance of our loan to Resaca and to provide Resaca with additional liquidity for the continued development of its assets.

The new facility earns interest at the rate of LIBOR plus 550 basis points and is subject to a LIBOR floor of 2.5%. The refinancing was beneficial to us as equity holders of Resaca and also by reducing our outstanding investment in Resaca it provided us with additional operational flexibility with regard to the diversification requirements under the RIC rules.

Also in June, Crossroads repaid its loan to us and repurchased our overrides in the Crossroads assets. We made our initial investment in Crossroads in June 2006 and the proceeds were used to acquire and develop producing oil and gas properties in the Gulf Coast region of Texas. Crossroads successfully developed and preserves and refinanced our facility with a commercial bank facility.

We’ve had one additional realization that occurred subsequent to June 30 as Steve mentioned. In July BSR Loco Bayou repaid the balance outstanding under its loan to us which included past due interest and totaled approximately $3 million. As you recall, we had previously written the fair value of our investment in BSR Loco down to $1.3 million and placed it on non-accrual status. Additionally, we continue to hold an override in royalty interest in BSR Loco’s properties and warrants to purchase 50% of the membership interest in BSR Loco Bayou.

As of June 30, we had carried the override at a fair value of $20,000 and we had no value attributed to the warrants. We are currently considering an offer from the management of BSR Loco to repurchase the override and/or warrants.

Also in July we had negative news related to Night Hawk. As we mentioned earlier, Night Hawk Transport I LP and its affiliates filed a voluntary petition under Chapter 7 of the bankruptcy code after failing to reach a restructuring agreement with its senior lenders. We hold approximately 17% of Night Hawk’s second lien senior credit facility along with two other institutional investors. At March 31 the balance was approximately $14.8 million and we carried that investment at a fair value of $10 million.

Night Hawk had a good business model providing services to oil and gas producers in several of the more active bases in the US. Not unlike other service providers, the first quarter and late ’08 was very difficult for Night Hawk as many of its customers reduced their spending and activity.

As a result, Night Hawk’s cash flow decreased and though it continued to service its senior debt, the company found itself in default of some of its senior debt covenants. In our opinion the business though stressed was sound and could have recovered. However, the senior lenders felt otherwise and their actions left the company led the company to believe that it had no other option than a Chapter 7 filing.

As of June 30, we have marked the fair value of our investment in Night Hawk at $0 and while we are pursuing all of our rights and remedies in the Chapter 7 proceeding, we do not expect a material company on our investment at Night Hawk.

Additionally in July, as Steve mentioned also, we completed a restructuring and follow on investment of $5.8 million in Alden Resources. The restructuring included increasing the interest rate on our senior credit facility from LIBOR plus 800 basis points with no LIBOR floor to LIBOR plus 900 basis points subject to a floor of 3%. Additionally we added a pay in time provision for the next 12 months. If the PIK option is utilized, the interest rate increases to LIBOR plus 1200 basis points subject to the 3% floor.

Furthermore our follow on investment was made in the form of a preferred equity issue which provides us with the right to receive all distributions from the company until we have received a return of capital and achieved a rate of return hurdle on all of our investment in Alden. As you recall, Alden is a producer of specialty coal located in the central Appalachia region of the United States and Alden produces blue gem coal which is a rare coal with certain characteristics such as ultra low ash, low sulfur, and a hardness that is used in the manufacture of silicon metal. The unique specification of blue gem results in a premium price and less price volatility than other types of coal such as thermal or metallurgical coal.

The proceeds from our follow on investment will be used to expand the surface mining operation to a newly permitted acreage in Tennessee and to resume operations at an underground mine in southeastern Kentucky.

During the second quarter we have made no commitments to new portfolio companies but we have reviewed a significant number of investment opportunities. Through June 30 we have reviewed 69 potential investments with a total value of approximately $3 billion not including potential secondary market investments.

However, the overall quality of those opportunities left something to be desired and since July, we have seen a marked increase in quality and are presently working on 6 high quality potential investments. Of course we can’t be certain if we will consummate any of these investment opportunities but the last several weeks seem to indicate that issuers and investors may be narrowing the bid asked for it that has kept issuers and investors apart and made new investments difficult to complete this year.

Furthermore, with the repayment of the Treasury facility that Steve discussed, we are even more sensitive to the diversification requirements pursuant to the RIC rules and we are considering selling participation in some of our larger investments as we have done in the past to manage those requirements.

Finally, I’d like to discuss a brief summary of our portfolio investment performance results to date. Since the IPO in November of ’04, we’ve made investments in 27 portfolio companies with a total cost of approximately $587.4 million. Of that total we have realized or substantially realized investments with 14 out of the 27 portfolio companies and generated proceeds of approximately $320 million from investments with a cost of $248.3 million resulting in a realized unlevered cash on cash internal rate of return of 26%. Assuming a liquidation of the remaining portfolio at the June fair value were unrealized investments, the total portfolio since inception would generate an unlevered cash on cash internal rate return of approximately 12%.

That concludes the highlights of the portfolio performance and status and we’ll turn the call back to John.

John Homier

Thank you, Kelly. Let me continue in the theme of portfolio performance and discuss the quality of the existing portfolio. As you know, virtually all of our investments are negotiated and often illiquid securities of energy companies. Accordingly, we maintain a system to evaluate the credit quality of those investments. Even though it incorporated quantitative analysis, the system is a qualitative assessment. It is intended to reflect the overall long term performance of the portfolio company’s business, the collateral coverage of the investment, and other relevant factors.

Based on this system, as of June 30, 2009, with the exception of our investments in Formidable and Night Hawk, we feel that our investments and portfolio companies are generally performing satisfactorily and we feel have fundamental characteristics and structures that should allow them to tolerate the economic environment and associated weakness in the energy markets that we are now experiencing.

From a collective individual company and general market conditions we recorded net unrealized depreciation of $4.4 million during the second quarter, bringing total net unrealized depreciation to about $74 million. While with the exception of Night Hawk and Formidable we continue to believe that these investments have good long run prospects for recovery and total return. We may not be able to fully realize those returns in today’s markets.

As of the end of the quarter, we assessed that in the aggregate, the fair value of our investments and targeted portfolio companies is $200 million, resulting in net asset value of $238 million or $10.99 per common share. This compares to a net asset value of $266 million or $12.29 per common share at the end of 2008 and $243 million or $11.23 per common share at the end of the first quarter of 2009.

Of the 21 rated investments and 18 portfolio companies, compared to the prior quarter end, one improved in rating, three declined in rating, and 17 remained the same rating. 11 investments totaling $139.7 million or approximately 51% of the $274 million in target investments and commodity derivative instruments on a cost basis are carried on our watch list due to deterioration and asset coverage slower than expected development of the assets supporting the investments, or the downturn in general economic and energy market conditions.

While restructuring of some of these watch list investments has been and may be required, subject to those general economic and commodity market conditions in the long term other than Night Hawk and Formidable, we do not currently foresee significant permanent long term deterioration in the existing portfolio. Investments in four of our portfolio companies totaling $59 million or about 22% of our target investments again on a cost basis are carried as non-accrual or were carried as non-accrual as of June 30. One of those four investments, BSR Loco, repaid in full, including all past due interest at the end of last month subsequent to the end of the quarter.

Based on cost, the distribution of our ratings in our risk evaluation system with our highest quality investments rated 1 are as follows: [Res] 1, we have two investments for approximately $500,000. Res 2 we have one investment for approximately $30 million. We have one investment for approximately $12 million at Res 3. At Res 4 we have 6 investments for approximately $87 million. At Res 5 we have four investments for approximately $71 million and at Res 6 we have four investments for $21 million. Three investments totaling $53 million are rated 7.

Substantially all of our investments are either secured by our borrowers’ assets or otherwise at the upper level of our borrowers’ capital structure. As of June 30, 86% of our targeted investments on a fair market value basis are at the top level of our borrower’s capital structures with no securities senior to ours. These investments are either first lien or if not secured in a traditional sense, either under direct ownership interests or have limitations on capital senior to us. The remaining 14% of our targeted investments are in a junior position vis a vi other senior lenders.

The distribution gives an average rating on a dollar weighted fair market value basis of 4.1 at the end of the second quarter 2009. For reference our weighted average rating was 3.9 at the end of 2008 and 4.1 at the end of the first quarter of 2009.

We continue to believe that overall our portfolio remains sound with good potential for appropriate long-term risk-adjusted returns. We believe that the overall quality of our portfolio is evidenced by recent repayment and refinancing activity.

We are please that three of our investments matured to the point that they were able to repay our investment with lower cost capital and our proceeds from their operations. As you know Crossroads and Resaca had been carried at cost for our valuation methodology had dictated that we report unrealized appreciation for our investment in BSR. These were payments in general, or I mean in full generated modest capital gains for our portfolio and provided cash to fully repay our investment credit facility leaving us with full facility and cash on the balance sheet to pursue new investments.

As we discussed in previous calls NGPC is largely an asset-based lender to companies that operate in the energy industry. And that industry requires constant and substantial investment to maintain and expand capacity to meet the needs of growing world population and long-term expansion of GDP. But having said that, our view is that there is a worldwide imbalance currently between energy supply capacity and demand. And this will continue to drive soft and volatile commodity prices in the near term. The continued weakness of the U.S. and global economies will perpetuate this imbalance.

However, in the medium term even with only modest economic growth the depletion will reestablish balance between supply and demand. Important points in that regard are the following. First, world oil decline rate of established production is similar between 4% and 5%, or were reported I should say to be between 4% and 5% per year. By U.S. natural gas decline rate of established production is reported to be as high as 20% to 30% per year. Worldwide, over 25 producing countries are now past their peak production.

Third, over 50% of U.S. natural gas production comes from unconventional resources. And furthermore it's been reported that currently 55% of U.S. natural gas production currently comes from wells drilled in just the prior three years. And of course the U.S. rig counts has decreased dramatically in response to lower oil and natural gas prices over the last several months.

In the longer term we expect to see growth in U.S. and world economies placing renewed demand on all energy sources both hydrocarbon as well as alternative. With that view of the environment over the long term our base underwriting price for oil and natural gas remains in the range of $60 per barrel and $6 per MMBTU with lower natural gas prices prevailing in the near term. In making investment decisions of course we also look at the sensitivity to our investments to prices lower than that.

In the near term we continue to see the effects of the economic environment in the winnowing out of players in the [mesoning] energy finance space. Senior banks continue to tighten credit availability while hedge funds and other general investors have continued to withdraw funds from this space. Significantly there has been a noticeable retrenchment by dedicated mesoning energy competitors. In the 2004 to 2008 timeframe we counted as many as two dozen dedicated players in this space. Today we believe that number is ten or less with some of those appearing to be on the sidelines.

We believe that realignment such as this in the energy mesoning finance space should facilitate many good risk return opportunities for NGPC going forward. In fact, as Kelly indicated in his deal summary statistics after a moribund to start to the year we're now beginning to see more higher quality investment opportunities that are appropriate for the type of mesoning capital we provide.

We believe that NGPC is well-positioned to capitalize on current and growing market opportunities as the economy and energy markets mend over the next many months. We expect to continue to invest in this market and to do so in a measured and delivered pace.

To conclude, we know that despite the negative impact of the economic and energy market's downturn on two of our investments, overall NGPC is well-positioned for stability and opportunistic growth. We feel that the negative impact of the current economic downturn on our existing portfolio remains manageable and that our investable capital and low leverage present opportunities for new investments having the potential to provide good, long-term risk-adjusted returns.

That concludes our prepared comments. I'll now turn the call back over to Felicia to facilitate Q&A.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions)

Your first question comes from Greg Mason - Stifel Nicolaus & Company, Inc.

Greg Mason - Stifel Nicolaus & Company, Inc.

Good morning, gentlemen. Could you talk about with your current facility expiring in a year how much of that facility are you comfortable drawing down upon at this point? And could you provide us a little more color in the press release you mentioned, you're looking at extending that facility? Could you give us some color on those two questions?

Stephen K. Gardner

Sure, Greg. This is Steve. Depending if, it all would depend on the term of what we were funding through a draw on the facility. I would say, you know, maybe 1/3 to 1/2 of it, a lot of that will be driven by our confidence level in extending it which is pretty high at the moment.

We are in the process of rounding up the existing banks. We're looking at a two-year extension that would take it out to 2012. So, essentially starting this month we would wind up with a three-year extension with a three-year facility.

Our existing bank group is all on board. You know, it's just getting through the process and getting it papered up and done. But we're hopeful and they expect that we'll have something done certainly during this quarter.

Greg Mason - Stifel Nicolaus & Company, Inc.

And just to clarify, that extension, there would be no review period in the middle. Just some other BDCs have recorded a long-dated maturity but with an annual review that's caused some problems.

Stephen K. Gardner

Okay. No, it would be under substantially the same terms as you might expect that I fully anticipate that the spreads will widen. But our current facility doesn't have an interim review.

We do have a twice yearly independent review of the valuation metrics and process. And the banks do have the ability to exclude from the facility which in the way ours works it's not a borrowing-based, but is a net asset value test. They can exclude from eligible on that asset value any loans that they choose to. And as an example in the past they've excluded Formidable because of the status of that investment. But other than the valuation review on a semi-annual basis there's no midterm look-see that could change anything.

Greg Mason - Stifel Nicolaus & Company, Inc.

Great. And, John, you had mentioned that today you have no borrowing to outstanding and some cash. Would you mind telling us roughly how much cash you have on hand today after the repayment?

Stephen K. Gardner

$19 million, Greg. Sorry for jumping in on you, John.

Greg Mason - Stifel Nicolaus & Company, Inc.

Sure. And then could talk about the $59 million on non-accruals at cost? Can you remind me what that number was last quarter? And is Nighthawk the only thing new?

Stephen K. Gardner

Nighthawk is the only thing new. So, that number would have been roughly $44 million I believe last quarter because the Nighthawk is approximately $15 million on a cost basis. So, Nighthawk's been added. BSR Loco was non-accrual. It's now been repaid. But as of June 30 it was still on non-accrual.

Greg Mason - Stifel Nicolaus & Company, Inc.

Okay, great. And then can you talk about the tax income impact from Nighthawk? If you realize that does that count as a capital loss or does that offset ordinary taxable income?

Stephen K. Gardner

It will not offset ordinary taxable income. We're, we haven't made the final determination on the expected tax loss because we don't know what our realization from the liquidation will be. That's going to be a moving target. But it would be a capital loss. It would not impact distributable taxable net investment ordinary income so to speak.

Greg Mason - Stifel Nicolaus & Company, Inc.

And then one last question and I'll hop back in the queue. In your royalty income on the income statement of $2.8 million typically that's had both ATP and I believe Alden's royalty income. Is that number this quarter solely ATP or is there any other income in there?

Stephen K. Gardner

It does not have Alden in it. It does have, it's some modest amounts from example Crossroads and Tammany and I believe Greenleaf and actually from BSR as well. But those are fairly small amounts.

Greg Mason - Stifel Nicolaus & Company, Inc.

Would you mind quantifying it, $100,000, $200,000, in the ball park?

Stephen K. Gardner

$100,000 would be a top-end number for those, the combined amount.

Greg Mason - Stifel Nicolaus & Company, Inc.

Thank you.

Stephen K. Gardner

That would be ATP, Greg.

Operator

Your next question comes from Jasper Birch - Fox-Pitt Kelton.

Jasper Birch - Fox-Pitt Kelton

In terms of Kelly gave us some good color on the pipeline, and Greg asked some good questions on that in terms of, very helpful answer in terms of where your leverage is going, could you sort of give us a little bit more color in terms of one, do you, you said you were looking at six new investments? Do you also see possible more refinancing in your portfolio? And also sort of what would the run rate of an investment going forward? I'd imagine that you aren't going to, you know, ramp up your investments immediately.

John Homier

Yes, can I just start on that and then, Kelly, you can just? Jasper, I wish I knew because we only want to, you know, clearly we only want to make what we think going in are good high-quality investments. But we're in a space where we are taking what we think is reasonable risks to get higher rates of return on investments that we make.

And as Kelly will elaborate on in just a second the first half of this year defied any kind of run rate just simply because the market was so seized up. And so right now we're just beginning to see things loosen.

If we went back to, let me just go back to a normal time more or less. We, I think in a normal kind of market whenever that happens again, and I don't mean the overheated market of the, well I don't know, the first part of 2008, the last of 2007. I don't mean an overheated market like that.

But in a normal market I think it's very reasonable for us to have a run rate of $25 million to maybe as much as $50 million - Kelly, you can chime in for per quarter of new deals. So, it's easy to make a run rate of $100 million a year and probably as much as $150 million.

But I don't have any confidence that I can predict for you when we would return to kind of a normal run rate. Kelly, what thoughts do you have?

Kelly Plato

I would concur with what John said. There's just very little visibility that the six deals that I mentioned it seems like we have some traction. You know, we're early on all of those.

And in total there are about $150 million of total investment out of those six that we were able to get every one of them. I think our whole position would be in the $50 million to $60 million range in aggregate. But it's just hard to say where those are going to come out.

On the repayment side the only real visibility we have is with respect to Anadarko and ATP. And those are, you know, together there. They're repaying plus or minus $2 million a month on both those investments.

And then a couple of our portfolio companies are in the process of working on deals that would probably result in some or a partial or a full repayment to us. But we really don't have any visibility on how those are going to turn out or what the timing of those deals would be.

John Homier

So, we haven't been able to give you a real good answer.

Jasper Birch - Fox-Pitt Kelton

Yes. I just was looking at your thought process. And so in terms of the six deals and maybe or even more broadly sort of strategically looking at where you're going, are you sort of, are you changing sort of your focus? Would you be shifting away from natural gas in this environment or is it really, you know, just highly dependent on how secured your assets are and what the pricing is?

Kelly Plato

We're maybe a little more skeptical of gas in the short term than oil. But I think that the biggest change is in the past we were somewhat agnostic to current income versus total return and we were focused more on all in risk adjusted rate of return. I think we’ve got a strong bias now based on where our portfolio is for assets with current income and then also just considering where we are in our portfolio, we have quite a bit of drilling potential in our portfolio that we’re really on hold right now waiting for a little stronger commodity price environment. We’re probably less focused on deals that have substantial drawing and development components to it.

Jasper Birch - Fox-Pitt Kelton

Okay, that’s helpful. I know you’re long term target for natural gas is $6. Do you think that’s what like a 2,000 ton event? What’s your sort of, what’s your curve on that? When do you think it’s going to get back up there?

John Homier

I think we don’t perform to that level until 2011. You know, if you look at the future, it’s very bright now, it’s in very strong in tango on the next two or three months to the first part of 2010. 2010 probably has a 12 month, it’s probably a little less than $6 on the forward curve right now, I would think. So, over the years, we’re planning on it taking longer but we plan for it to happen sooner. We’re planning on taking longer to get back up to that level.

We think that’s a long term sustainable level though, it probably needs a price signal like that in order to facilitate or inspire investment to bring that new production on. There are many nations that it’s reported that the marginal cost is lower than that, that we need more than just a few low cost basins to provide the natural gas which is around 20 CTF and has every indication that it can grow more over the long term in the United States.

We need a price signal probably better than in the $6 range to make many of the basins economic and productive. Otherwise, we would find ourselves spiraling down in terms of production, I think. You caught the statistic right, it’s 55%, this was I think from Bernstein. They said 55 just recently, 55%’s been growing every year in US production of natural gas comes from what was drilled in the prior three years.

So, we are on a steep decline curve and we do have the price signals in order to continue to make up the gas that we need in the next decade. Having said that, we’re oversupplied today by anywhere from 3 to 6 BCF it would seem. And that’s showing up in the front end of the forward curve really, frankly, not as dramatically as we would expect. Prices are still holding between $3.50 and $4 and yet storage is as full as it’s ever been and there doesn’t seem to be any indication that we won’t finish the season with more gas and storage than ever before.

So, I think there’s plenty of short term bearish indicators for gas right now but for longer term it has to meet a price that would stimulate development. We think that’s around $6.

Jasper Birch - Fox-Pitt Kelton

Now I just have two quick questions. Did the $12.8 million invested last quarter, was that all already committed capital?

John Homier

Yes, it was. The majority of that I believe was to black pool.

Jasper Birch - Fox-Pitt Kelton

Black, okay. And then in terms of ATT, could you guys break out what the actual amortization expense was but the actual royalty income was?

Stephen K. Gardner

Sure, Jeff and this is Steve. The amortization was roughly $3 million and the revenues on it I believe were roughly $1.8 million, $1.9.

Jasper Birch - Fox-Pitt Kelton

Okay, thank you very much, I appreciate it.

John Homier

And that stays before any income from the puts, of course.

Jasper Birch - Fox-Pitt Kelton

Yes, naturally.

John Homier

Actually, the income from the puts would be included in there.

Jasper Birch - Fox-Pitt Kelton

Okay, and then, okay. That will probably be…

John Homier

And that negative from the put would have been 1.1 million.

Jasper Birch - Fox-Pitt Kelton

And that negative inclusive of the puts is 1.1. Okay. And do you have it without the perks what the revenue is?

John Homier

Steve?

Stephen K. Gardner

Yes, I’ll have to get back to you with that.

Jasper Birch - Fox-Pitt Kelton

Okay, that’s fine, thank you guys very much. I appreciate your time.

Operator

Your next question comes from Pavel Molchanov – Raymond James

Pavel Molchanov – Raymond James

First, just to confirm a couple of numbers, make sure I’ve got them right. The; on the credit watch list in total was that $140 million? At quarter end?

Stephen K. Gardner

Let me just look for that. Do you have that [inaudible] receipt?

Pavel Molchanov – Raymond James

When I had…

Kelly Plato

Right, I’ve got 139, the number I have here is 139.7.

Pavel Molchanov – Raymond James

Okay, that’s fine. And, also the weighted average investment tier?

Stephen K. Gardner

The weighted average, you mean the RES rating?

Pavel Molchanov – Raymond James

Uh huh.

Stephen K. Gardner

4.1

Pavel Molchanov – Raymond James

4.1, okay, excellent. And then, you mentioned that they’re still using $6 long term price on the gas side. Obviously, oil is not, not as relevant for your company’s, like what are you guys using on the oil side?

Stephen K. Gardner

$60 long term.

Pavel Molchanov – Raymond James

Okay and that’s all [fill in] changed?

Stephen K. Gardner

Yes, and it’s, frankly we’ve got actually got a little bit of [contango] on that. I think it goes to 60 long term but we’re actually running something a little bit lower right now. I know the current market’s 70 but, as you know, there’s many influences to that so, which would evaporate overnight.

Pavel Molchanov – Raymond James

Yes, absolutely. You mentioned that because of RIC requirements you may be selling down in interest in some of your compounds, some of your portfolio investments, is that something that would impact only the larger ones or potentially would any of those be available to sell down?

John Homier

Probably there’s, probably just the larger ones. And the ones that come to mind are Tammany, Alden, and APC.

Pavel Molchanov – Raymond James

Okay and for, on a basis of, look if you were to let’s say maintain your debt-free status, what would be the max for individual investments in the future? There would be an upper cap on that?

John Homier

Well, if, you know if you just took the right numbers and just took, like say $250 million, other than there would be some movement around those edges. The, would you ask the question again?

Pavel Molchanov – Raymond James

Oh sure. If you were to remain debt-free, what would be the upper limit on the size of individual investments that you would make in the future?

Stephen K. Gardner

Excuse me John. With net assets at $240 million roughly, the 5% basket would be at $12 million on an unlevered basis. We could also have room in the big basket, we could do investments larger than that but we only make small basket investments, so to speak, the cap would be $12 million on an unlevered basis, approximately.

Pavel Molchanov – Raymond James

Yes, that’s exactly what I was looking for. Thanks guys.

Operator

Your next question comes from Vernon Plack – BB&T Capital Markets

Vernon Plack – BB&T Capital Markets

Steve, is there an used fee on your revolver?

Stephen K. Gardner

There is currently, it runs between 25 and 50 basis points. On the current construction, I would expect it to be somewhere on 50 basis points going forward, possible up to 75. Those numbers are still un-negotiated, so to speak. Because if we get the extension, it will probably bump up a little bit.

Vernon Plack – BB&T Capital Markets

Okay, so that will continue to have an impact obviously since you’ve, you know there’s nothing drawing on that facility right now.

Stephen K. Gardner

That’s correct.

Vernon Plack – BB&T Capital Markets

And, you mentioned, I just want to confirm that the $20 million, rather $0.20 per share in NI that’s carried forward into this year?

Stephen K. Gardner

Yes, approximately. It’s a little bit over that.

Vernon Plack – BB&T Capital Markets

Yes, great, thank you.

Operator

We’ll go to Greg Mason - Stifel Nicolaus & Company, Inc.

Greg Mason - Stifel Nicolaus & Company, Inc.

Could you just give us an update on Formidable, where it stands today?

Stephen K. Gardner

Sure, Greg. We are in the process of foreclosing on the company. We have been working with management for several months on the keyhole alternatives and thought we had dialed in on a consensual deal where we would take control of the assets and it looks like we’re not going to be able to make a deal with the management to where... We’re in the process of foreclosing the first notice of the foreclosure comes out in this week and we think if everything goes to plan and it should be the end of this month, then we would have the actual sale.

Greg Mason - Stifel Nicolaus & Company, Inc.

And is the value, the $5.6 million at the quarter end, is that kind of what you had in mind knowing this was the road you were going to go down or could that potentially change given the deterioration in negotiations?

Stephen K. Gardner

Well, we still think, there’s a range of potential outcomes there and we believe we’re, our goal is, we think we’re being conservative in our evaluations and we would, we would certainly work to recover more than that. But, I’d say there’s always risks in these types of situations.

Greg Mason - Stifel Nicolaus & Company, Inc.

Sure and then all that you mentioned that you’re going to be able to get kind of a required rate of return before other equity, participants get cash. What kind of return hurdle in that equity piece?

Stephen K. Gardner

I don’t know. Give us a second?

Greg Mason - Stifel Nicolaus & Company, Inc.

Sure, sure.

Kelly Plato

I don’t think we can disclose that, it’s part of a confidential negotiation between us, the company, and the other investors.

Greg Mason - Stifel Nicolaus & Company, Inc.

Okay, to make sure I’m understanding right when you say get a required rate return on all of your investments, that includes the debt pool as well, that would be fully paid out as well as some equity return before other equity holders would get paid?

Kelly Plato

That’s correct. It is on all dollars end as they’re advanced and the hurdles calculated based on the timing of actual cash flows, dollars advanced and dollars received from whatever source. It is an equity rate return.

Operator

At this time there are no further questions in the queue. I’ll turn the conference back to management for any additional remarks.

Stephen K. Gardner

John, if I could, I’d like to respond to Jasper’s detailed question there. On ATP, the total depletion calculated in the second quarter was $5.3 million. The revenues recognized was $2.3 million so you have the net negative impact of $3 million. The hedging gains for the quarter were $1.9 million and that’s how you come up with the $1.1 million negative overall.

John Homier

Just to be sure, some of this is timing effects. It had worked the other way for us in I think the fourth quarter of ’08, correct Steve?

Stephen K. Gardner

The income was substantially higher last year in ’08.

John Homier

So what we’re doing is the income, because of the differences in timing between the depletion schedule and actual production schedule and the hedging schedule give rise to some discontinuities between quarters.

If that completes the questions, I want to once again thank everyone for being on the call today and we look forward to talking with you during the quarter and also to visiting with you at our next quarterly call when we’ll report the earnings for the company for the third quarter of 2009. Thank you again for being here.

Operator

That concludes today’s conference. Thank you for your participation.

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