Special Focus on Independent Oil & Gas
Reduced overall economics and net present values will result in less equity being available for gas weighted producers. Even if a company has assets with strong economics but is too highly levered, they may not have the liquidity to weather any operational setbacks or any further gas price degradation. To overcome this challenge, prudent management of the company’s balance sheet is essential and the company must be able to differentiate themselves from their peer group to generate interest from equity investors. Strong resolve by management, directors, shareholders and providers of capital (lenders and equity firms) will be required to survive in this challenging natural gas market.
Softness in the natural gas forward curve has made lofty oil/NGL prices even more attractive to producers. Many gas weighted companies are attempting to transition their operations to target oil or liquid rich gas reserves. Another option is to sell assets to increase corporate liquidity and allow management the ability to transition to higher netback projects. However, gas transactions would likely occur at depressed valuations as evidenced by the last four month softness in the existing merger and acquisition market.
One challenge oil weighted entities operating in the western Canadian sedimentary basin will encounter is the ability to secure rigs, equipment and personnel to execute their scheduled drilling programs. This could be further impacted by a warmer than average winter, resulting in a shorter drilling season in some areas.
Indifferent to play type, the higher cost of technologically driven plays has changed the landscape for junior O&G companies. Horizontal wells utilizing multi-stage fracturing are significantly more expensive than conventional horizontal wells. To fund these drilling programs many companies look to joint ventures, farm-outs, or the use of sub-debt in their capital structure. Alternatively, we have most recently seen sales of these assets by juniors to capture premiums being paid by larger or new foreign entrants in the WCSB who are looking to gain an entry into these new and promising play types.
The challenges in this market, while significant, are not new to many management teams. Historically the majority have proven themselves to be very resilient; we expect 2012 will be no different.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Chris Walcot, Director, Progressive
Progressive are finding that clients are becoming increasingly concerned with difficulties in raising capital investment, especially for North Sea projects. This region is increasingly being hailed as yielding poor ROI on assets. Concerns over the maturity of the North Sea field and an increase in tax rates have made financiers wary of investing in a region that has traditionally presented attractive opportunities for independents.
As a consequence, it is now more important than ever for independent Oil & Gas companies to demonstrate that they are an attractive proposition for investors; that they are in a strong position to provide ROI when opportunities do arise. The key is for independents to show they are prepared for growth.
Streamlined and efficient financial processes and reporting capabilities are an excellent demonstration of this. Investing in fit-for-purpose financial systems will also allow you to concentrate on core business activities such as securing capital, without the frustrating distractions caused by an inadequate back-office set-up.
Of course, you’ll also have more time to invest in identifying new opportunities; if a change in direction is required, focussing on the core business strategy will be far easier if there is confidence in a robust infrastructure that ensures the smooth running of operational processes.
Getting suitable financial and procurement systems in place early on will be a far more straightforward process than trying to implement these procedures and controls down the line, when the business has grown in size and complexity. When the time comes, you’ll need to have the processes in place to meet the demands of stakeholders and the controls in place to occupy a position on the Main Market. Sophisticated finance and procurement systems will prepare a business for this progression.
Whilst recent events - namely BP’s significant development investment - have suggested that for now, the UK North Sea is still a viable opportunity, independents should capitalise on their agility by putting the infrastructure in place to ensure they are able to adapt and adjust to the fast changing conditions of the industry.
We advise our clients to prepare themselves for growth, act like the company they want to be, and give investors the confidence to part with capital.
Drillers and Dealers :::
::: February 2012 Edition
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