NGP Capital Resources' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: OHA Investment (OHAI)

NGP Capital Resources Company (NGPC) Q2 2013 Earnings Conference Call August 8, 2013 11:00 AM ET


Stephen Gardner - President and CEO

Scott Biar - CFO, Secretary, Treasurer and Chief Compliance Officer


Troy Ward - KBW

Robert Dodd - Raymond James


Ladies and gentlemen, welcome to your NGP Capital Resources Company's Second Quarter 2013 Earnings Call. At this time, all lines are on listen-only mode with Q&A session to follow. (Operator Instructions). As a reminder, this conversation is being recorded.

Now, I would like to turn the call over to your host, NGPC President and CEO, Steve Gardner.

Stephen Gardner

Thank you, Danielle, and thanks to all of you for joining us on today's call. With me today is Scott Biar, our Chief Financial Officer. I will make some opening remarks after which Scott will provide details regarding our financial results for the quarter. Then I’ll discuss our portfolio activity and the prospects for new investments prior to opening up for questions.

First I need to remind everyone that our remarks today may include comments which would 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’s website to review such filings. We undertake no obligation to publicly update or revise any forward-looking statements which speak only as of today’s date.

Okay. For the second quarter 2013, we reported total investment income of $9.6 million, our highest quarterly income figure since 2008, and net investment income of $5.5 million or $0.26 per share. In June, we had two successful exits, Resaca and Castex Energy Development Fund, which together generated $45 million in cash proceeds and $4 million of interest income. $2.5 million of which was the result of the make whole interest provisions in those two loan agreements.

During the quarter, we funded $29 million of new investments and received cash proceeds of $50 million from repayments and redemptions of our portfolio investments. Our investment portfolio balance reads over $250 million during the quarter, but with the June repayments, at the end of the quarter, the total fair value of our investment portfolio was $209 million.

So it has been a solid year for us thus far. For the first six months of 2013, we have earned $0.37 per share, and net investment income and the declared dividends totaling $0.32 per share. We have closed $83 million of new investments and five transactions and received $77 million in repayments, which is a pretty high turnover rate for us, from a store perspective.

Also, it's a little bit unusual but noteworthy, that over 80% of our portfolio value is in investments placed within the last 24 months. Consistent with last quarter, the total fair value of the portfolio at June 30 was 93% of costs, and there were two investments on non-accrual, representing $14 million of costs and no fair value.

I will now turn the call over to Scott.

Scott Biar

Thanks Steve. For the second quarter of 2013, total investment income was $9.6 million or $0.46 per share, compared to $5.3 million or $0.25 per share in the second quarter of 2012, and $5.8 million or $0.28 per share in the first quarter of 2013. As Steve mentioned earlier, the June repayments of the Resaca and Castex Energy Development Fund Term loans accounted for $2.5 million or $0.12 per share of make whole interest income.

The remaining increase was primarily attributable to larger overall investment portfolio balances. Weighted average yields were sequentially flat, but slightly lower than in the second quarter of 2012.

The bulk of the make whole interest income came from the Resaca transaction. The Resaca term loan, which financed an oil and gas development project in the Permian Basin, originally earned paid in kind interest of 12%, which was raised to 14% in March of 2012, when Resaca violated financial covenants, and had a provision, whereby upon liquidation or repayment, the lenders were entitled to receive a make whole premium, that would equate to an internal rate of return of 25%.

During the term of this loan, it was unclear when or if a liquidity event would take place, and if so, whether the value received would be sufficient to fund the make whole premium, and as it turned out, the sale of Resaca's assets resulted in our achieving an internal rate of return of 21%. Not quite the full 25%, but still a very nice return over the 2.5 years that the loan was outstanding.

Operating expenses for the second quarter of 2013 totaled $4.1 million, increasing $1.5 million compared to the second quarter of 2012, and increasing $700,000 compared to the first quarter of 2013. A sequential increase was primarily attributable to a $400,000 incentive fee to our investment advisor, since we exceeded the quarterly investment income hurdle rate for the quarter, and as a result of higher interest costs on higher debt balances, supporting our investment portfolio.

The year-over-year increase was also a result of higher interest costs, the incentive fee, and the higher base management fees to our investment advisor, as a result of higher total asset balances. Other general and administrative costs were fairly stable across all periods, at roughly $1.3 million per quarter.

Our net investment income for the second quarter totaled $5.5 million or $0.26 per share, compared to $2.6 million or $0.12 per share in the second quarter of 2012, and $2.3 million or $0.11 per share in the first quarter of 2013. We had net realized gains totaling $1.1 million or $0.05 per share during the second quarter of 2013. We had a gain of $1.8 million on the sale of our 5% limited partnership interest in Castex Energy Development Fund, and offsetting this gain was $200,000 realized loss on the disposition of our warrants to purchase Resaca common stock, and the recognition of some post closing liabilities associated with two investments that we sold back in 2011.

We had net unrealized depreciation totaling $3.0 million or $0.15 per share in the second quarter, primarily reflecting mark-to-market adjustments totaling $2.3 million on our investments in the publicly traded senior unsecured notes of Midstates Petroleum and Talos Production. We also recorded a reduction in the estimated fair value of our Spirit preferred units of $1.6 million, and net increases in fair value on the remainder of the portfolio, totaling $900,000.

The development work at Spirit is progressing more slowly than planned, largely as a result of factories outside of Spirit's control. But it is still early in the process, and not a major concern. In May, we repurchased approximately 521,000 shares of our common stock under our stock repurchase plan, for an aggregate price of $3.4 million or $6.49 per share. Remaining authorization under the stock repurchase plan is $2.4 million.

Our net increase in net assets resulting from operations during the second quarter of 2013 was $3.5 million or $0.16 per share. We declared dividends of $0.16 per share, and our stock repurchases resulted in an increase of $0.08 per share in net asset value, bringing our net asset value as of June 30, to $9.13 per share, a 1% increase for the quarter, and a 4.6% decrease from our beginning of the year net asset value of $9.57 per share.

At June 30, we had cash and cash equivalents of $49.2 million. We had borrowed our full $72 million available under our investment facility, and our long term debt-to-capitalization ratio at the end of June was 28%, and our net debt-to-capitalization ratio was 12%. In July, we repaid $44 million of debt outstanding under the investment facility, and we currently have $28 million of debt outstanding under the facility and $44 million currently available.

With that, I will turn the call back over the Steve.

Stephen Gardner

Thanks Scott. I'd like to provide a brief update on the status of our limited-term overriding royalty interests in certain producing offshore oil and gas properties, owned by ATP Oil and Gas Corporation. We have continued to receive our monthly production payments, although as we discussed on our last call, operations and productions have ceased on the Gomez properties as of April 30, 2013. During the second quarter, we received production payments totaling $4.9 million, of which $1.8 million was attributed to production from Gomez properties, and $3.1 million was attributable to Telemark production. Going forward, we will receive no further payments attributable to Gomez.

Our share production from the Telemark Properties alone currently generates sufficient to cover our contracted rate of return and also withdrew -- returned a portion of our capital investment on monthly basis. We believe that with the continued development of these reserves, the future production of Telemark will be sufficiently to satisfy the limited term overwriting royalty interests.

Since our last call, a number of hearings have been held and resubmitted regarding the lawsuit, seeking declaration with our term overrides, constitute valid and enforceable real property interests and not executory contracts that are subject to rejection under the U.S. Bankruptcy code. The court has heard arguments regarding our motion for Summary Judgment of this case, but has not yet ruled on our motion. A trial date and other deadlines in the lawsuit have been abated, depending the outcome of our motion for summary judgment and various other motions.

I would like to point out that recently ATP requested and received an order from the bankruptcy court, allowing the sale and conveyance of an overriding royalty interest with DIP lenders on terms that are substantially similar to our term overriding royalty interest. So apparently, they wish to have their cake and eat it too.

We remain confident that whether the court grants our motion for summary judgment or not, it should ultimately conclude that our term overriding royalty interest does in fact constitute a valid sale of the overall property interest and production payment, and should therefore be outside the bankruptcy state. Once that issue is determined, the second phase of litigation will commence to adjudicate the outstanding disputes, with certain material (inaudible) claimants.

In May, ATP conducted an auction of its assets and selected a credit bid from Credit Suisse, as administrative agent and collateral agent to the DIP lenders, at the highest and best bid. On July 9, 2013, the Court entered its interim order approving the sale of ATP's assets, including the Telemark properties, on an interim basis, subject to a final hearing at which the Court will hear evidence regarding the financial and operational viability of the proposed purchaser. The final hearing date has not been scheduled. Our understanding is that Credit Suisse is in the process of capitalizing and purchasing the company.

Sale of the Telemark properties would remain subject to certain existing encumbrances including our term overriding royalty interest, as well as the outstanding litigation regarding (inaudible) of our sinterest. We believe that the purchaser will continue to develop the Telemark properties, which should ultimately increase total production and help us recoup our investment, with the contractual rate of return.

With respect to portfolio credit quality as you are aware, we rate all of our investments from one to seven, with one being the highest credit quality. At the end of the second quarter, our average portfolio rating on a dollar weighted fair market value basis was 4.2, compared to 4.2 at the end of the first quarter as well, and 4.1 at December 31, 2012.

Of the 23 rated investments we held as of June 30, 2013 compared to end of last year, 12 investments retained the same rating, two investments declined in rating, one improved and we added eight new investments during the first six months of this year.

Deal flow had slowed somewhat during the summer months. We have a number of deals we are reviewing, particularly on the energy side, and we expect that (inaudible). We funded $83 million of new investments through June 30, and we have $44 million of borrowing capacity available. While it's impossible to project with any degree of certainty, the timing of future transactions at this stage, I think we have the capacity in the pipeline to support an additional $40 million to $50 million of new investments between now and the end of the year. That would be sufficient to support our dividend rate going forward, we will see.

In summary, I am pleased with our quarterly results and the investment activity thus far in 2013. With successful exits like Resaca and Castex are always great to see in our business. Unlike this time three years ago, when we had $70 million come back to us into the fund, into the single transaction, and $150 million over the course of the year, I feel much more confident now in the size, quality and diversity of the current portfolio, which stands at $209 million, with (inaudible) income rate of $5.5 million to $6 million.

In 2011, our portfolio value got down to as low as $130 million late in the year and it took us almost a year to get back on leverage. So I am also more confident in our prospects with putting money back to work in a reasonable amount of time, and are (inaudible) investments with appropriate returns, as we continue to grow the investment portfolio.

I believe our strategy is working. We are building the portfolio responsibly, creating a foundation for top line growth, solid core earnings with some opportunities for equity upside, and solid overall portfolio credit quality.

At this time, our remarks are concluded, I will turn the call back over to Danielle, to pose any questions.

Question-and-Answer Session


Thank you. (Operator Instructions). And our first question comes from Troy Ward, from KBW. Please go ahead.

Troy Ward - KBW

Great. Thank you and good morning guys. As you think about, with the sizeable dollar amount of prepayments that came back at you this quarter, which was definitely a positive, concerning the Resaca of course. But can you step back and just tell us kind of your overarching strategy, over diversification of the portfolio? Of course, you brought on Michael Brown to do middle market late last year, and then just kind of -- how you think does the portfolio look after you start deploying this capital, and the use of the proceeds from this additional leverage?

Scott Biar

Troy, I think you are going to see -- we are going to play it as it lets. We are going to take the opportunities as they come, as we have opportunities in the middle market with Michael and his efforts, we will continue to put money to work there. We aren't by design, trying to roll out of the energy space. We still see significant opportunity there. I think that it's fair to say that over time, middle market may well take a bigger piece of the pie, because there is just more opportunity there. But we are still in the energy bulk market, and we are doing as much business there as we think is feasible. So I think for the balance of the year -- looking at the current pipeline, and how that would be, we will see more energy than we will -- middle market deals done. I just think (inaudible) normal path in that area, but it's -- I don't have a percentage point at which we will try to balance the portfolio of between energy and middle market, if that's helpful.

Troy Ward - KBW

Okay. And then can you speak to kind of what you're seeing as far as yields available on the energy side, or maybe if Michael's available, on the middle market side as well. Obviously most of our coverage deals with more private equity backed middle market, and we are seeing significant compression in yields. Can you speak to what you're seeing specifically in the energy markets Steve?

Stephen Gardner

Sure. I would concur with your read on the middle market, but it is getting tighter, and certainly more competitive. The things we are looking at, with a longer list of folks that are in the room with us, so to speak. On the energy side, it's really fairly consistent, and it's not unusual for that to be the case. We tend to see the energy -- the mezzanine space for energy. We tend to see coupons in the 11% to 13% range, a lot of them seem to gravitate around 12, and the play in the energy space is the degree of equity upside that you get. That has been true over all sorts of credit cycles. There is very little correlation in the -- for example on the high yield indexes, and in the rates that we see in the energy index. It's as though, it's pretty sticky at 12% in that area, it's just a function of what you can get on the upside, or what additional bells and whistles you can obtain in the markets, be it from an outlandish perspective.

Troy Ward - KBW

Are there covenants that you -- you kind of hang your hat on in the energy space that you won't back away from? And are you seeing structures get -- trying to be competed away like, again we are seeing more in the middle market alone?

Stephen Gardner

I would say, we are fairly rich on our covenant structures. When we revised our investment policies in 2011, we tightened much of what we do on the energy side. We are looking at leverage to proved reserves that we don't just violate. Proved, developed and producing reserves, that we just won't stretch beyond, and it's pretty typical to have a standard packaging and energy, and it's not some place where we feel comfortable reaching.

In the middle market side, obviously there is pressure. Backing up, one thing I will say, we played in the high yield market in the energy space, and even though -- and we haven't been seeing through the spring, some considerable pressure on yield. The market [splashing] some deals awfully cheaply. In May, and early part of June, it backed up when the freight market kind of jumped, but it settled back in again, and it wasn't a really large move in the rate structure for those. So we are not seeing much in the way of high yield energy, that has got a double digit coupon there, and those that we have seen, are not things that we would want to participate in.

Troy Ward - KBW

Okay. Then one final one, on ATP, just a little bit of color. Obviously, following it from afar, but with call it $3 million coming off the Telemark properties, that's what you have to fund the ORI going forward. It looks like about 10 quarters, call it two years kind of run rate, based on what you received in the second quarter, to fulfill your $30 million. From your experience, Steve, what is your expectation of the ATP bankruptcy? I mean, how long -- do these energy companies fit in bankruptcy for a long time or is it just something like once, get everybody on the same path, and somebody to roll it out of bankruptcy, and the DIP will be taken out, and at that point, it would like change your overriding royalty interest?

Stephen Gardner

Here is the way I see this particularly. One way to say it is, it depends on -- in the energy space and bankruptcy, it depends on what court you are in. In this one, with ATP, I am not going to the court. It's just a complicated case. It's I think different from, for example, the GMX, our case which is in Oklahoma court, which has been moving along without delays for the most part, unlike ATP. There are so many parties involved with ATP, that it has taken us all. I see the ultimate resolution of this case, is being the sale of the properties to the DIP lenders, led by Credit Suisse. That group will -- and it will not change the terms of our overriding royalty in just one bit, it's for having the sale, everything will be as it is.

The big difference is, Credit Suisse, for it to make sense for this group to own these properties, they are going to need to put more capital into them to develop them, and they frankly -- are making awful lot of money by (inaudible). There is a tremendous amount of potential in these remaining fields, and so, what I would expect to happen is, if we will see at some point, I don't know if it's six months, or 12 months, that I would think -- I hope at least in that timeframe. But they will close on the sale, there will still be a slew of issues, a lot of unsecured creditors, a lot of creditors in the trade, with (inaudible) claims on the properties, that it made claims, will have to be resolved somehow by the court, but I would believe the DIP group will acquire the properties and start putting money in the ground, to develop the reserves.

My own personal estimate is that will increase production from Telemark, and (inaudible) and other properties that we don't have interest in, and it's probably to want to accelerate the return of capital and return on our overriding royalty interest.

Troy Ward - KBW

Great. My biggest takeaway from reading everything was the highest return is probably going to be on, being a bankruptcy lawyer in the energy space. That's all my questions. thanks for the color guys.

Stephen Gardner

When it's good, those folks make a lot of money. When the energy market's struggling over a period of year, it can get pretty farce.

Troy Ward - KBW

Thanks guys.

Stephen Gardner

Thanks Troy.


Thank you. (Operator Instructions). Our next question comes from Robert Dodd from Raymond James. Please go ahead.

Robert Dodd - Raymond James

Hi guys. I apologize if this has been asked, if you've addressed it already to some other caller today. Could you give us some color on expectations if you have any, on additional retailers? I mean, Resaca and Castex, both excellent returns, (inaudible) premiums etcetera. Are you hearing anything from any of your other borrowers, or those who are involved in, about more of that activity coming in the second half? Because obviously there is a lot of refinancing broadly, that's not (inaudible) applicable to the energy space?

Stephen Gardner

Sure Robert, that's -- and we haven't addressed this year, but I would say for the balance of the year, for the next six months, five months I guess it is; one of our investments are not energy investments, roughly $40 million outstanding, that's likely to be refinanced and repaid during the balance of the year. That's the only one that we have, that we expect any significant amortization on, or redemption, and that's a pretty likelihood, is my estimate. So other than the $40 million and the mild amortization or reductions you will see from ATP, right now we expect the balance of our portfolio to remain outstanding.

Robert Dodd - Raymond James

Okay, I appreciate it. That's all guys.

Stephen Gardner

You bet, Robert.


Thank you, and I am not showing any further questions. I would like to turn the call back to Steve Gardner for any further remarks.

Stephen Gardner

Thank you, Danielle, and thank you all for joining us today, and I hope you enjoy the balance of the summer.


Thank you. Ladies and gentlemen, thank you for participating in today's conference, this does conclude today's program, you may all disconnect. Everyone, have a great day.

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