Funding for Small Oil Cos in ’09 Scarce, Costly

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Published at: www.rigzone.com

Rich Pickings for Majors Amongst Smaller Oil Co.s

December 9, 2008

Analysis by: GLG Expert Contributor

Start up oil companies typically fund exploration through issuing equity, and fund development through issuing debt.  Now that the debt (and most of the equity) markets have dried up, small companies are suffering.  Particularly at risk are those with portfolios that are high in exploration assets (prospects) but low in discoveries and producing assets.  Those companies with assets in high risk areas (technically and politically) may find that the recent collapse in oil price (and the growing perception in the market that it will stay lower for some time) has removed all the upside that justified the original investment in the first place.  Such companies are vulnerable as their "cash burn rate" is eating up current financing and there is little prospect for immediate refinancing or generating revenues.  In this scenario, cash rich, larger oil firms can pick up assets (or whole companies) on the cheap.

Michael LynchConsultantMichael E. Lynch

BP has already said that it was on the prowl. Other majors will follow

December 8, 2008

RIGZONE news reported on an article by James Herron of Dow Jones Newswires on December 3. Mr. Herron said that funding for small to medium-sized oil companies will be scarce in 2009. When capital becomes available, it will be expensive. Michael Powell of Barclays Capital confirmed this opinion. Simon Ashby-Rudd at Tristone Capital said that investor shrink from financing risk He cited the case of Oilexco, a Canadian North Sea operator whose share price has recently plummeted. Bankers said they expected acquisitions to increase next year. The oil majors have plenty of cash. Several large private equity firms have over $250 million to invest. An oil asset bought today will be a money maker in three to five years. But potential buyers are cautious because of the uncertainty of value. Financing has now become a strategic issue. No company will make an acquisition if it will jeopardize their balance sheet in a short period of time. Total SA recently decided not to bid for Nexen Inc.