Over the next decade, significant shifts in the energy system will occur. Among these is the projected dominance of the United States in the global oil and gas industries. Of course, to do this, companies need reliable oil and gas funding.
Historically, companies in this industry have sought 40 percent of the capital required for operations from the equity and debt markets. The companies behind the most recent boom have spent upwards of $265 billion in costs.
Fortunately, oil prices in the US have hovered steadily around $60 per barrel. Just last year, they reached a high not seen since 2014. What’s more, exports of oil and gas have increased, which means prices are finally getting past oversupply.
Despite the bright predictions, competition remains a specter haunting independent companies. Read on to learn more about challenges when it comes to financing oil and gas projects.
Equity Capital Conditions for Small Exploration Companies
For a variety of reasons, ascertaining a sufficient flow of equity capital still proves difficult for many small exploration companies.
Why? Many are still recovering from the financial crisis of the previous decade. This crisis has also made investors far less willing to take risks.
Another problem facing smaller-scale operations remains the availability of funding within the sector. For example, companies that struggle with cash flow problems or lack in scaling will find it difficult to stay ahead financially.
Companies that put all of their figurative “eggs in one basket” by concentrating all of their resources within one country or one project will also face a steep financial climb.
What’s the best way to overcome these problems? By ensuring that your company excels in communication and delivery. You need to make sure that you clearly and effectively communicate your commercial and exploration success.
If your company proves able to do this, you’ll avoid many of the issues that other small companies face when attempting to raise capital.
Equity Issuance and Perceived Risk
For many independent oil and gas companies, equity issuance remains their only option when it comes to pure-play exploration.
Why? Because these companies suffer from a lack of proved reserves coupled with low debt capacity. They also struggle with cash flow. As already stated, post-2008 investors remain shy when it comes to investments that aren’t a sure thing.
In many instances, they lost faith in exploration companies during this crisis, and this confidence has yet to be fully restored.
How are independent companies financing oil and gas projects in this context? By not only relying on conventional financing but also getting creative.
Some of the innovative strategies that they’re using include mergers and loan arrangements with service providers and concentrating on higher numbers of farm-out transactions.
Scarcity of Public Equity Financing
Exacerbating the problem that many independent companies face is a general lack of public equity financing. On top of this, there have also been constraints as a result of initially tight corporate credit conditions that have now loosened.
Again, the way banks now loan money is directly related to the financial crisis. In the midst of this event, they came under increasing scrutiny for their risky dealings, and legislation was enacted to prevent this behavior from continuing.
That said, many of these banks have now largely finished recovering and building their balance sheets. But lessons have been learned and continue to shape the future of public equity funding.
Risk management has taken center stage. Banks have responded by ramping up lending standards. Especially when it comes to small and mid-sized borrowers.
As companies have turned toward more creative forms of funding, competition for this capital has increased, too.
From the bond market to export credit agencies and project partners, more funding sources are available. But so is far more competition for these types of financial backers.
That’s why it’s important to find a lender who understands the oil and gas industries inside and out. They can provide you with the options you need to succeed in this competitive yet highly fruitful industry.
Capital Imbalances Faced by Small Companies
Independent oil and gas companies have also had to deal with a slew of new challenges when it comes to attracting financing on satisfactory terms. As lenders continue to shy away from risk-taking, many companies are getting left behind.
In other words, lenders want to see a strong financial track record, quality projects, and a platinum reputation before offering a loan. For companies just emerging on the scene, meeting these requirements can prove difficult or even impossible.
Independent companies also have hurdles to climb when it comes to project financing.
Why? Because the nature of the resources being utilized translates into less stability and predictability when compared to other large infrastructure projects.
After all, other projects are far better insulated from issues such as commodity price risk and inflation than the oil and gas industries.
Other Considerations When It Comes to Funding
Achieving quality, time, and cost targets also prove more difficult than ever before because of external factors including social issues and inadequate infrastructure.
The banking sector has a long memory. Recent trends point to oil and gas projects taking longer than they should and requiring more capital.
The reasons for these road bumps prove diverse and often out of the control of the companies involved. But this new reality continues to impact how many lenders approach risk mitigation and lending to small to mid-sized oil and gas companies.
The greater extension of this remains the general lack of lenders available for the largest, most costly, and most time-consuming projects.
Of course, there are exceptions to these rules. It is possible to find funding opportunities that make sense for your company.
For example, some funders don’t require signing any personal guarantees to the capital that you need to continue exploring and growing your enterprise. Find out more about our oil and gas funding model.
Dealing with Local Content Requirements
One area where independent companies often struggle is local content requirements. Depending on where projects happen, these companies may find themselves buttressing up local partners.
This often involves assisting weaker partners in raising their own capital and even lending to them on the same terms as banks. Export Credit Agencies (ECAs) have intervened to assist these local partners.
Many now offer services such as expanding securitization guarantee products. What’s more, development finance institutions and ECAs are now testing the waters of increased support for bigger transactions.
Addressing Infrastructural Considerations
Besides dealing with local content requirements, many companies find themselves constrained by unsatisfactory infrastructure in areas that they’d like to develop.
As a result, there is a growing move toward infrastructure investment as an asset class. Because of the long-term nature of the vast majority of oil and gas projects, they match up well with the liabilities of pension funds and insurance companies.
This works well since most institutional investors in infrastructure debt are private-sector pension funds, public pension funds, and insurance companies.
Overcoming Oil and Gas Funding Challenges
As you are probably already well aware, finding funding for small to mid-sized oil and gas companies comes with a steep learning curve. It also requires ingenuity and thinking outside-of-the-box.
Although the financial crisis of 2007 and 2008 is long in the rearview mirror, it has shaped this generation of lenders and investors in ways that can make it difficult to secure the capital that you need for exploration and other expenses.
As independent oil and gas companies have looked to more innovative funding opportunities, this has created a host of new lenders looking to fill the gap. Of course, this has also come with increased competition for this funding.
Besides these challenges, companies also face divergent allocation of funding. This can mean unsatisfactory lender agreements for small to mid-sized companies. Again, risk mitigation remains a driving factor behind these decisions.
Nonetheless, across all segments of the oil and gas industries, opportunities exist for improving the availability of funding. A reduction in costs is also possible in many instances. The potential for this growth proves exceptional.
What You Need to Know About Oil and Gas Funding Opportunities
When it comes to oil and gas funding, there are many opportunities that you may have yet to explore. You don’t have to do this alone. We’re here to help you navigate these complicated waters to find the best energy finance solutions for you.
Our team of individuals has more than 75 years of experience in the Petroleum industry. What’s more, we bring 50 years of firsthand knowledge of the financial industry to the table, too.
Our sole purpose is to provide capital to independent gas and oil companies who are producers and have current production. If this fits your company, then we’d like to speak with you about the possibility of working together.
Ready to discuss your project and explore the potential of how we can help your company meet and exceed its current industry goals? Contact us today to get the financial conversation started.