Special Focus on Independent Oil & Gas
Sarah Wharry, Head, Oil & Gas, finnCap
FinnCap is one of the leading brokers and advisers to small cap companies. Having established its oil and gas practice over the last two years it now advises 10 E&P companies with assets and operations around the globe.
One of the key issues facing our clients in 2012 will be funding. Small cap E&Ps have been the worst hit in the sector in the recent market turmoil. The overall sector performance has been relatively strong since the market bottomed out in August 2011 and larger caps have made a better recovery in value terms than smaller caps, some of which are still trading at significant discounts to their NAVs.
Our recent marketing suggests that institutional investors are regaining some appetite for risk and for smaller cap stocks, albeit on a more selective basis. If our clients can attract investors, their depressed valuation sometimes makes equity investment unpalatable from a dilution perspective. So the challenge will be trying to fund their projects in other ways either through innovative debt or convertible instruments or though farming down their assets to an industry player recognising the core value of the asset.
With limited capex funds available, there will the added challenge of utilising available cash where it will have the biggest impact and this is a trade-off between riskier, more expensive, higher return projects or lower impact safe play strategies.
Whilst valuations are low, there is also the danger of opportunistic M&A and therefore the challenge will be to demonstrate value through an appreciating share price in order that an approach will reflect a fair valuation for shareholders.
Overcoming these challenges in the coming year will be a test of managements’ patience, hard work and flexibility, with regular and informative dialogue with institutional investors of paramount importance to ensure a supportive audience for future plans.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Kevin Fisher, Partner, Corporate, Paul Hastings LLP
Many of the key challenges we are working on for our independent oil and gas clients comes down to one thing – money. In such a capital intensive industry, having reliable access to capital on a cost-effective basis is of paramount importance in driving the business forward. The challenges to raising and accessing capital can take many forms, including (i) market pricing, (ii) potential legislation that could impose new liability on operators, and (iii) potential regulatory reforms that could increase the cost of exploration and production activities.
In connection with market pricing, lower natural gas prices produce lower cash flows and lower reserve values. This, in turn, limits the funding available to companies under the typical reserve-based lending facilities employed by banks. On the legislation and litigation front, several oil and gas companies in various state jurisdictions are seeing new efforts by royalty owners to impose fiduciary obligations on operators with draconian penalties for the operators’ failure to live up to these heightened obligations. Several companies have been sued in class actions that attempt to impose these duties and extreme penalties. Certain interest groups have even proposed legislation to impose these standards.
On a much larger scale in the US, the debate about “fracking” continues. Some groups have even been proposing a complete moratorium on all fracking activities. Increased turmoil around fracking only roils the markets and does not do anything to help ensure that capital is available and that its cost remains low. All of these challenges have a direct impact on the bottom line and a company’s access to, and cost of, capital. In a time when a company may need additional liquidity to withstand any reverses or setbacks, or a company may need new capital to obtain and secure new sources of oil and natural gas, or a company may see an opportunity to expand through acquisition, these challenges require careful attention.
Drillers and Dealers :::
::: February 2012 Edition
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