NGP Capital Resources Management Discusses Q4 2012 Results - Earnings Call Transcript

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NGP Capital Resources (NGPC) Q4 2012 Earnings Call March 7, 2013 11:00 AM ET


Stephen K. Gardner - Chief Executive Officer and President of NGP Capital Resources Company and Member of Investment Committee of NGP Investment Advisor, L.P.

L. Scott Biar - Chief Financial Officer, Chief Accounting Officer, Treasurer, Chief Compliance Officer and Secretary


Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Robert J. Dodd - Raymond James & Associates, Inc., Research Division


Ladies and gentlemen, welcome to your NGP Capital Resources Company's Fourth Quarter 2012 Earnings Call. [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 K. Gardner

Thank you, Janine, and I thank all of you for joining us for today's call. With me is Scott Biar, our Chief Financial Officer. I'll start off with some opening comments, after which, Scott will provide some details regarding our financial results for the fourth quarter and for the full year, then I'll discuss our portfolio activity and prospects for new investments, following which, we'll open it up for questions.

First, I need to remind everyone 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'll 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 fourth quarter of 2012, we reported total investment income of $6.1 million and net investment income of $2.8 million or $0.13 per share. During the fourth quarter, we funded $14 million of new investments and received cash proceeds of $12.6 million from repayments and redemptions of existing portfolio investments. Our net reinvestment rate was modest in the fourth quarter. However, I'm pleased to report that we've executed $54 million of new investments, thus far, in 2013, including our first 2 investments in the realm -- mid-market arena.

We also had $23 million of redemptions and repayments, so far, in 2013, including the sale of the remaining $10 million of our EP Energy senior notes and the repayment of our $9.8 million of Southern Pacific Resources' second lien term loan.

As of December 31, 2012, the total fair value of our investment portfolio was $213.6 million, its highest level since December 2010. But when you consider the early 2013 investment activity, our portfolio is currently at its highest value since December 2008. Overall, I'm quite pleased with the growth of the portfolio, closing over $125 million of new investments during 2012, increasing our portfolio value from $145 million at the beginning of the year to $214 million at the end of the year and continuing to grow the portfolio on a net basis so far this year.

The total fair value of the portfolio as of the end of last year was 98% of cost and we had one investment on non-accrual, the Chroma preferred stock, which has been nonaccrual since 2009.

Last year, we purchased $358,000 -- 358,000 shares of our common stock -- excuse me, it was in November that we repurchased 358,000 shares of our common stock under our stock repurchase program, bringing our total number of shares repurchased during the year to 608,000 shares at an average price of $6.89 per share. These repurchases contributed $0.07 per share to our net of asset value per share during the course of the year. Under the terms of the stock repurchase plan, we have remaining authorization to repurchase an additional $5.8 million of common stock, subject to applicable securities laws and regulations that set certain restrictions on the method, timing, price and volume of stock repurchases. I'll now turn the call over to Scott, our CFO, to discuss the details of our quarterly and annual performance. Scott?

L. Scott Biar

Thank you, Steve, and good morning, everyone. For the fourth quarter of 2012, total investment income was $6.1 million or $0.29 per share compared to $6.3 million or $0.30 a share in the third quarter of 2012 and $5 million or $0.23 per share in the fourth quarter of 2011. The small sequential decline is primarily a function of the timing between sales and repayments of investments and the closing of new investments. The significant year-over-year improvement is primarily attributable to an increase in the size of our investment portfolio, particularly since the middle of last year.

Fourth quarter income was also impacted when GMX Resources failed to pay interest due on its 9% second lien note, which was due on Monday of this week. As a result of this failure to pay, we reserved 100% of our interest receivable from GMX as of December 31, 2012, which amounted to $400,000 or $0.02 per share.

On February 25, GMX announced that it hired a financial advisor to assist in exploring financing alternatives, including a potential balance sheet restructuring, in light of its current liquidity and cash needs to support its 2013 drilling program.

We currently hold $12.7 million of the second lien notes, which has an estimated fair value of $7.4 million on our December 31, 2012 balance sheet. We are monitoring the situation closely. GMX's failure to pay interest on Monday does not create a [indiscernible] default under our indenture unless such failure continues for 30 days. Depending upon how things develop over the next few weeks, we might place our GMX investment on nonaccrual status in 2013, but we have not yet made that determination.

Operating expenses for the fourth quarter of 2012 totaled $3.4 million, increasing $500,000 compared to the third quarter of 2012 and increasing $600,000 compared to the fourth quarter of 2011. These increases were primarily attributable to higher interest costs on higher debt balances supporting our larger investment portfolio, and slightly higher management fees to our investment advisor as a result of higher total asset balances.

Other noninterest-related general and administrative cost were relatively stable at around $1.3 million for each quarter.

Our net investment income for the fourth quarter of 2012 totaled $2.8 million or $0.13 per share compared to $3.4 million or $0.16 per share in the third quarter of 2012 and $2.2 million or $0.10 per share in the fourth quarter of 2011.

We had net realized and unrealized losses totaling $2.9 million or $0.14 per share in the fourth quarter of 2012, primarily resulting from the reduction in estimated fair value of our investments in the GMX notes and the GMX common stock. We ultimately sold all 229,000 shares of GMX common stock that we held at year-end last week for total proceeds of $750,000 resulting in a realized loss of $1.6 million, of which $800,000 was reflected as an unrealized loss as of December 31, 2012.

So our net decrease in net assets resulting from operations during the fourth quarter of 2012 was $200,000 or $0.01 per share and we declared dividends of $0.16 per share, bringing our net asset value as of December 31, 2012, to $9.57 per share, a 3.3% increase from our beginning of year net asset value of $9.26 per share.

To touch on the full year 2012 results for just a moment, for the year, we generated net investment income of $11.8 million or $0.55 per share compared to net investment income of $15.8 million or $0.73 per share in 2011. The 2011 results included a onetime income item of $4.5 million or $0.21 per share representing previously unrecognized interest income on an investment in Alden Resources, which we sold during 2011.

We generated net realized and unrealized gains during 2012 totaling $5.6 million or $0.26 per share compared to net realized and unrealized losses of $35.7 million or $1.65 per share in 2011.

So our net change in net assets resulting from operations had a significant turnaround from a decrease of $0.92 per share in 2011 to an increase of $0.81 per share in 2012. This is what enabled our net asset value per share to increase during 2012 for the first time in 5 years.

At December 31, 2012, we had cash and cash equivalents totaling $47.7 million. We had $59.5 million outstanding and $12.4 million available for borrowing under our investment facility. Our long-term debt to capitalization ratio at the end of December was 23% and our net debt to capitalization ratio was less than 5%.

After funding new investments in 2013 and repaying some debt outstanding under the investment facility, we currently have $43 million of debt outstanding under the investment facility and approximately $30 million currently available for borrowing under this facility. I'll now turn the call back over to Steve.

Stephen K. Gardner

Thanks, Scott. I'd like to recap the new investments we've made recently and then I'll discuss some recent developments for the couple of investments in our portfolio.

On October 1 of last year, we funded a $6 million participation of the Midstates Petroleum, $600 million private placement of 10.75% senior unsecured notes due 2020. In November, we purchased an additional $8 million base amount of the Midstates notes in the secondary market, bringing our current holdings to $14 million. Proceeds from this offering were used to finance Midstates' acquisition of the oil & gas properties of Eagle Energy Production. This is a nice yielding liquid security with strong credit quality, and it has traded up in value since we acquired it.

Similarly, in February of 2013, we purchased $25 million of the $300 million 9.75% senior notes offering issued by Talos Production to partially fund its acquisition of Energy Resource Technology, the oil & gas subsidiary of Helix Energy.

We acquired $20 million of this in original issuance and the other $5 million in the secondary market shortly thereafter. The Talos notes mature in February 2018.

In mid-Febuary, we closed our first 2 nonenergy middle market investments, including a $15 million subordinated note, with a $2.5 million equity co-investment in OCI Holdings, LLC, and a $9 million subordinated note from KOVA International. The OCI subordinated note matures in August 2018 and earns interest payable at a cash rate of 11% plus paid-in-kind interest of 2% per annum.

The KOVA subordinated note also matures in August 2018 and earns interest payable in cash at a rate of 12.75% per annum. OCI and KOVA both represent industry-leading businesses within their respective geographic and niche industry sectors. We expect to see the middle market portion of our investment portfolio grow as we continue to demonstrate our capabilities and strengthen relationships with fund sponsors and other middle market participants.

As many of you are aware, in August 2012, ATP Oil & Gas Corporation filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. We own limited term overriding royalty interest in certain producing offshore oil and gas properties operated by ATP in the Gulf of Mexico. Our investment was structured as the purchase of a real property interest in the underlying Gomez and Telemark properties operated by ATP.

Payments received under this royalty arrangement are first applied to our annual return of 13.2%, with any excess being applied to return of capital. The limited term overriding royalty interest expires after we have received all of our invested capital with our return at 13.2% per annum.

On August 23 of last year, the bankruptcy judge presiding over the case signed an order allowing ATP to pay amounts received after August 17, 2012, to parties entitled to receive them, including royalty owners such as ourselves, provided that we sign a disgorgement agreement in which we agree to repay ATP any amounts that the bankruptcy court later determines to have been inappropriately paid.

We have received our monthly payments as agreed from ATP since September of last year. And as of December 31, 2012, our unrecovered investment balance was $37 million and we had received $8.9 million subject to the disgorgement agreement.

There is current litigation in the bankruptcy court seeking a declaratory judgment as to whether our overriding royalty interests do, in fact, represent a purchase of real property interests as we believe, which would result in our interests being outside the bankruptcy estate, or whether they constitute financing arrangements or rejectable executory contracts that will result in NGPC holding claims against the bankruptcy estate. Trial is currently scheduled for April 30 and May 1 of this year. Meanwhile, the Gomez and Telemark properties are involved in a court-sanctioned sale process, whereby ATP is listing bids for the potential sale of these and other offshore properties operated by them.

We remain firm in our belief that our overriding royalty interests constitute real property interests and that we will ultimately recover our investment with the specified return.

As you're aware, we rate all of our investments from 1 to 7, with 1 being the highest credit quality. At the end of the year, our average portfolio rating on $1 rated fair market value basis was 4.1 compared to 3.9 at September 30 and 4.1 as of September -- December 31 of 2011.

Of the 19 rated investments we held as of December 30 -- 31 of 2012 compared to December 31, 2011, 10 investments retained the same rating; 2 investments declined in rating; 2 improved; and 5 investments were added during 2012. No investments have been placed on nonaccrual during the year 2012.

Deal flow has been fairly steady in both the energy sector and the middle market. As I mentioned, we've closed 3 new investments, thus far, in first quarter of 2013 and have several prospects that look promising with the potential to close within the next 90 to 120 days. Although the timing and likelihood of closing is hard to project, we believe that the new investment activity in 2013 could be similar in magnitude to what we experienced in 2012, with $100 million to $125 million of new investments, depending upon the rate of redemptions and availability of capital, among other factors.

In summary, I'm pleased with our quarterly results and the direction our portfolio is taking. Our investment portfolio is growing, we are building a foundation for solid core earnings and have some opportunities for equity upside. Our net asset value has increased over the year and our overall portfolio of credit quality is strong.

And now, I'll turn the call back to Janine, and we'll entertain any questions you might have.

Question-and-Answer Session


[Operator Instructions] The first question comes from Greg Mason of KBW.

Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division

Steve, would you mind talking about the middle market business you made? You closed your first couple of deals there. What are you seeing in terms of pipeline? And do you think that that's going to become greater mix of your assets going forward versus the traditional energy plays?

Stephen K. Gardner

Sure, Greg. And by the way, congratulations on your recent acquisition and new moniker. Glad that PBDC is still in place an intact. Sure, we've closed our first 2 deals, we've been working on it for a number of months. We actually have seen pretty good volume. We've extended the number of term sheets. It's a very competitive market, as you know, from your research. We're happy with the 2 deals we've gotten. It's -- I do expect it will comprise a greater percentage of our portfolio over time. The opportunity set and the market will determine exactly what that percentage is. But at present, I can see it becoming anywhere from 30% to 40% of our portfolio. We still have our core strengths in the energy space, but the middle market does seem to provide a much broader field for us to play in, if you will. And Michael Brown, our -- the guy running our group in that field, is very well connected and we're seeing a fair amount of solid activity.

Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division

Great. And then also on the share repurchase, you've still got quite a bit remaining. Can you talk about your views -- with the stock being where it is today, your views on wanting to repurchase it at these levels versus investing opportunities? And also, can you remind us when -- I know you're subject to windows where you only have a brief period of time you can repurchase. So can you talk about the -- how those can be transacted?

Stephen K. Gardner

Absolutely. We are still very much of a mind that at these levels it makes a lot of sense for us to acquire shares, and we would expect to spend the full $5.8 million if the market stays where it is or gives us the opportunity. We think it's accretive and a smart thing to do with our capital. As far as window is concerned, we -- the next open window of opportunity will be after we release first quarter earnings because our policy is to have the window open during the second month after we release. However, that takes us right up against the first quarter filing. And so, in this particular period, we have a long closed window period. I will say that we intend to visit with the board in the next couple of weeks about implementing a 10b5 plan, which would allow us to purchase on a regular basis with no decision by management or otherwise by the Board, just as a lot of insiders do where they're acquiring, on a regular basis, with a set amount of capital devoted on any given day. So we're exploring ways to be able to give ourselves greater opportunity outside of the window issues that we have.

Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division

All right, great. And I mean, you've touched on it quite a bit on the ATP, but if things don't go well in the April and May trial, can you talk about their ability to sell some of those properties and you still recover your amount? Or is it really subject on you getting a favorable ruling in that trial?

Stephen K. Gardner

Well, currently, the way they're listing the properties, operating the properties for sale, they're not selling our interest that we own. Those would be held out. And whoever purchased the properties would have -- they would be subject to overriding royalty interests. So if -- whatever company purchases them, and to the extent they can operate them profitably, if they produce a barrel of oil, we're going to get our 5% or our 10.8% of the proceeds from that. So the sale process, if anything, if it goes to a qualified operator, which I presume, if the court's going to approve it, that would be the case, should put us within -- on firmer ground that our production will be able to be produced and sold and that we can get proceeds from it. If we have the trial in end of April, early May, and for some -- these are my words, not our counsel's words -- crazy reason, the court would rule against us, then we would have a claim in court and it's not -- and against the estate. And it's not clear whether that would be a secured claim or what the nature would be because it's never really happened before, just in circumstances specific to ours. For the court to determine that our interest is not a real property interest, it would basically mean that banks that are lending against -- the first-lien loans against reserves or have mortgages on an executory contract right, as opposed to real property interest, it would turn, in my view -- again, I'm not a lawyer, but in my view, it would turn 50 years of oil & gas finance upside down. And so, not that the courts don't do crazy things sometimes, but that's our point of view.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Steve, this is Troy. Would -- I know, when you went into this transaction mid last year, you felt like -- that with structured property. Would you say there is considerable amount of precedent already set in the court that would align with how you have it structured?

Stephen K. Gardner

Well, certainly. I do think that now. We're in a bankruptcy court, not a federal district court, so -- which is where the precedent lie -- precedents lie. I don't know exactly how to find it, but all of our motions and pleadings, et cetera, are public record. And so, you can read the long list of precedents we believe we have in our arguments, and you can read ATP's arguments -- by the way, I don't want to -- I don't want to argue the case over the phone here but when we entered into this deal, ATP, in many ways, a firm that represented that they believed that they were conveying a real property interest to us. Their interest -- their intent was to do so. We have acknowledgments from the first-lien holders that this is what took place. But obviously, when you're in Chapter 11 situation, priorities change and view points change and they have to look out for all the stakeholders, so they take, perhaps, different positions than they've taken very recently in the past.


[Operator Instructions] The next question is from Robert Dodd of Raymond James.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Just a kind of a follow-up on ATP and then a question about something else. On the auction process to the assets, as you mentioned, your bank's -- court-sponsored auction process, the bids, were due, call that back 2 weeks ago, February 26? I mean, have you gotten any feedback from how those have shaken out, if the property bidders -- have you had any discussions with them about what their view is of your royalty interests?

Stephen K. Gardner

We've not had a discussion, and let me clarify the entire bid process. There is -- the court-sanctioned bidding process, it's about a 50-page document that's filed a public record, and they're multiple stages. The February 26 date, I believe, was an indication of interest. I believe, bids were due -- the initial bids were due on the 5th, which was 2 days ago. The process itself and the timing of -- and those bids are confidential. We have no idea what they are or who made them. The way the process works, it's subject to an order that said it was contingent in part upon whether or not ATP got production initiated on its Clipper production facility. As of March 3, they did not do that. And so, there is an extension of the timing that -- it's somewhat of a complex formula, but it could push it back anywhere from 2 to 4 to 5 weeks, depending upon what the next level goes. So we're happy that -- once bidders emerge, we're happy to visit with them. We have been in communication with our brethren that also own overriding royalty interests. We're looking at every which way this could play out. And in the meantime, we will defend what we own. And hopefully, continue to collect, as the court has ordered, our monthly payments.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Okay, appreciate the additional color. And so on the next question, looking at your capital position. I mean, you mentioned that 2/3 on the '13 could be -- you're seeing kind of pipeline activity that could point it in the direction of, maybe, the volumes you saw in 2012, depending on the availability of capital because at the end of the year -- and obviously, you've paid down some of the revolver, et cetera, and my estimates is you had about $60 million between cash and revolver rate availability at the end of the year. You're looking at the net deployment so far in Q1, you've used half of that already. I mean, what -- do you have any comments on how you expect to manage your capital position this year? And then also kind of tied into that, are you getting any -- when you look into the middle market, where they care about certainty of close, et cetera, et cetera, a great deal, are you getting any feedback from sponsors and transactions you're looking at that they'd be -- that they'd want to see more capital flexibility on your part before bringing you into more deals. Any color on any of those issues is great.

Stephen K. Gardner

Fair question, Robert. I think your analysis of what's available today is correct. We have roughly $30 million available on our line of credit. We -- when we look forward and think that we can do another $100 million or so of investments this year, we're looking at what our expected redemptions and repayments are. We have several -- we have a couple of investments that are amortizing regularly and we have a couple more that we expect to refund in their entirety this year. And so we think that we can manage another $100 million given our current capital structure. We also have a couple of investments that are rather liquid. They're 9% to 10% type of yields. Obviously, we like these investments, but if we saw something that we thought was of good credit that would put it to 13% or 14% or whatever percent yield, then we could trade out of that, because what we own has been trading rather well. So -- and the entire mix is, without raising additional capital, we think we can do another $100 million. Obviously, we're consistently in conversation with banks and other folks about adding to our debt capital capacity.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

I appreciate that. Any color on -- and just the last part, in terms of as you move more into the middle market, how those -- do you have sponsors that may be viewing that, if any, differently for your normal experience?

Stephen K. Gardner

No -- sure, Robert. Sorry, I missed that. We've not had any feedback at all about capital availability. If we have any expectation that we might not be able to fund something, we won't bid on it. And so to date, in our history, we've never been in the situation where we couldn't raise capital or otherwise have capital to fund. So, at this point, we've not had any feedback from either the energy sources or the middle market that have been concerned about that. Obviously, with $30 million today available, it's a pertinent question, and it's one that we're happy to address.


[Operator Instructions] I am showing no further questions in the queue and would like to turn the conference back to Stephen Gardner for any further remarks.

Stephen K. Gardner

Thank you, Janine. I thank you everybody for your time. I know it's a busy earnings season, and I appreciate your attention to us. We will talk to you again soon. Thanks for your time.


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

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