Summary
Paula Dittrick, Senior Staff Writer noted in the December 10 issue of the Oil & Gas Journal that with oil and gas prices up, ample capital is available to the oil and gas industry. Public and private equity and bank financing are options for the independent producer. John Schaeffer, head of oil and gas investing at GE Energy Financing Services sees many ways that small companies can obtain financing. Master Limited Partnerships are popular. The average small oil and gas operator concentrates on drilling and production and is not sophisticated in finance. Finding the optimum source can be daunting. Majors traditionally rely on public debt markets. But smaller operators turn to both equity and mezzanine debt. Private equity providers typically take 50-80% interest in the company. It is uncertain how long this financing will be available. Strapped fund managers are pulling funds to build liquidity caused by sub prime exposure. International options still exist at the World Bank.
Analysis
Everything depends upon how severe the present crisis becomes and how long it lasts. Typically, the smallest of the operators are the first to find the doors closed. Those companies with substantial producing assets can usually find additional funds for property development. But exploration is rarely, if ever, funded by debt. The international majors have been strengthening their balance sheets throughout 2007. Part of it may be due to higher prices for crude oil but some of it reflects uncertainty. The weakening dollar has consequences for the American consumers that have not been fully recognized. One of those is that the price of crude oil, because it is an international commodity, varies inversely with the dollar. For U.S. consumers, this translates into higher prices for gasoline, diesel, jet fuel and heating oil. Piled on top of deteriorating home values, the ingredients of recession are clearly present even though no politician wants to recognize such a possibility. Should it develop that at some point the small independent producers can no longer obtain funds for drilling operations, then domestic crude oil production would decline rapidly, putting further upward pressure on product prices. The implications extend to non-conventional natural gas sources, which have been an important part of the U.S. domestic energy business these last few years. Natural gas production has been declining rapidly in the U.S. for some years and only intensive drilling in shales and coal bed seams has held production at present levels. Annual reports for 2007 and first quarter 2008 for small and mid-sized U.S. companies will get close scrutiny in this financial environment.
