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LONDON Financing challenges for the small cap company

Majid Shafiq, MD Corporate Finance at FirstEnergy Capital, will be presenting on capital raising under constrained market conditions, at the SPE London 2nd Annual Conference and Exhibition. In this interview he discusses the financing challenges faced by small cap oil and gas firms.

Why has the market remained so ‘uncertain’ for those managing oil and gas portfolios?

The main problem over the last 12 to 18 months for the small cap space has been that financial markets have been almost closed, with the equity markets proving particularly difficult in 2012. On top of that, risks in countries where oil and gas firms operate have in many instances increased – the political turmoil in North Africa and the fiscal treatment of assets sales in sub-Saharan Africa being recent examples.

What are the current issues impacting on the raising of capital to fund North Sea and global opportunities?

Tapping into North Sea opportunities is expensive as it entails offshore and sometimes deepwater operations. The North Sea is also extremely competitive and heavily explored, making further discoveries of large oil and gas fields less likely. The region has seen some high profile failures in recent years, resulting in pull-back from North American investors. London-based investors are also looking for higher potential returns from regions like Africa and the Middle East, where we have seen some very good exploration successes.

How do these factors impact specifically on oil and gas operators, investors, and the wider industry?

Operators often need to rationalise their portfolios because the finance market, particularly equity but also debt, remains difficult. Meanwhile, equity fund managers have been much more selective because they’ve been suffering from redemption calls from their investors. However, we have seen more activity in the equity markets this year. There is a knock- on effect on the service sector, particularly in North America where low

gas prices have impacted the utilisation rates of drilling rigs and other service company equipment.

How can current approaches to portfolio management be improved?

You should always be looking to manage your portfolio creatively in order to ensure it remains attractive to potential investors. Asset sales and farm-outs should be considered as an alternative and often lower cost of financing than issuing equity. It’s also essential to have financing in place so that you are ready to undertake activities you are committed to. The companies that are running into problems are the ones that leave it too late. The secret is to have a solution in place well in advance of an obligation to drill – whether you want to fund it 100 per cent, bring in an equity or strategic partner, or farm out part of the asset.

How can oil & gas companies make themselves more attractive to potential investors?

In the current market investors are now looking to tick a lot more boxes before they make an investment decision. They want companies that have more liquidity and that offer the potential for a high near term return. Oil and gas companies therefore need to spread risk and capital across more assets. They should also be continually looking for ways to rationalise their portfolio, to ensure attractive acreage and geology is included in their asset base.

The SPE London Section 2nd Annual Conference and Exhibition, ‘Managing Oil & Gas Portfolios in Uncertain Markets’ will be held on 22-23 May 2013, at Savoy Place. The conference programme targets senior industry and City professionals working in sectors including corporate finance, asset acquisitions and divestitures, corporate mergers and acquisitions, investment analysis, equity research, portfolio management, business development, and valuation of oil and gas assets.

For more information go to or follow the conference on Twitter: @SPElondonconf

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Industry Considerations in High Risk Areas Companies face technical and non-technical obstacles as they

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