Paddie Mac is back

Patrick Crow
Washington, D.C.
[email protected]

Other than straining balance sheets, one effect of the latest plunge in oil prices has been to revive prospects for a U.S. Petroleum Development Investment Management Corp., otherwise known as Paddie Mac.

It would be a federally chartered corporation designed to help the oil and gas industry raise capital for field development projects, similar to privately owned, publicly traded corporations like Fannie Mae, Sallie Mae, and Freddie Mac.

Basically, Paddie Mac would standardize use of financing mechanisms for development projects, helping companies-especially smaller ones-get access to lower-cost capital.

Energy Department officials were very enthusiastic about Paddie Mac when oil prices were low in 1994-95 (OGJ, Feb. 20, 1995, p. 32), but their interest faded when they discovered major oil banks were lukewarm on it.

David Dorn, chairman emeritus of Forest Oil Corp., Denver, and Dwight Moorhead, a Littleton, Colo., oil and gas consultant, say Paddie Mac is an idea whose time has come-again.

The concept

Paddie Mac could function either as a separate entity or as a new service of an existing government-sponsored enterprise such as Fannie Mae or Sallie Mae.

Paddie Mac would limit itself to loans for proved reserves and would diversify risk by servicing a large number of producing properties.

It would give qualified lenders access to hedging for their producers. By complying with Paddie Mac procedures and standards, the hedged loans could qualify for sureties for up to 90% of loan amounts.

And the hedged, suretied loan amounts would be salable to Paddie Mac at discount factors based on its low-cost access to debt markets.

The plan would allow banks of all sizes to be originators and servicers of the price hedges and financing. Less than 20 of the nation's largest banks now offer the oil industry loans that integrate price hedging.

Paddie Mac would charge fees and realize margins on interest rates and oil and gas price hedges. Any risks assumed would be laid off in established markets or mitigated through its practices and policies. It would not operate on federal funds and would not be connected with the Energy Department.

But Congress would have to establish Paddie Mac and lend it a few million dollars for start-up funds, which could be repaid in a few years.

Benefits

Moorhead said Paddie Mac's features offer the potential to reduce the oil industry's average cost of capital by about 4%.

In 1995, DOE estimated that every 1% decrease in the industry's cost of capital would result in a 6% increase in recoverable U.S. reserves, because more projects would be economic to develop.

"So a 24% increase in U.S. reserves and production appears to be realistically available via Paddie Mac," Moorhead said.

Dorn is working to gain support for Paddie Mac within the oil industry, on Capitol Hill, and in banking circles-especially among independent bankers.

His objective is to see legislation introduced in the 106th Congress next year.