to the new reality, where there's a whole lotta money looking for
a home in the oil patch. In fact, potential investors of varied
ilk often are flashing the kind of cash that conjures up memories
of the boom days -- although this time around, rather than the reckless
abandon of past cycles, it's being dispensed for the most part with
intelligence and forethought.
the available greenbacks are even being targeted not just for development
projects but also for exploration, which for so long has been shunned
by low-risk-demanding investors.
a lot of enthusiasm for drilling, not seen among individual investors
since the late '70s when everybody wanted to be in the drilling
business," said James Gibbs, chairman of Dallas-based Five States
Energy. "But you don't hear cocktail talk about drilling and starting
up new companies all over the landscape like then.
can't go in and get a reasonable ROR (rate of return) by buying
existing properties, so they're forced to do drilling," Gibbs said.
"They would like to do development drilling, but there's not much
of that available at a reasonable price, so then they're forced
to be in the exploration business."
you ask, is this money coming from?
on who's talking, the sources are rife: both domestic and international
individuals and companies (small), equity funds, banks and more.
Not to be ignored is the sizeable amount of internal capital available
for drilling at companies who have paid down debt -- thanks to soaring
commodity prices -- and now have cash on hand for the drill bit.
a different source than what it used to be when it was major companies
and large independents," said Dan Smith, executive vice-president
of Sandalwood Oil & Gas in Houston. "Now so much of it's coming
from consortia put together with money raised from private sources,
mostly high-end earners around the world."
not the doctor and dentist investors who once proliferated in the
oil patch, convinced that every well would bring instant wealth.
Rather, it's a wide range of individuals seeking more bang for their
bucks than the paltry returns offered through such instruments as
savings and money market accounts and CDs, according to Smith.
want to see a 10-12 percent ROR, there's not many places you can
safely do that," Gibbs said. "You have higher expectation of returns
in exploration drilling than that; it's hard to find a higher ROR
thing is when the market collapsed after the tech era, people looked
around, asking where's a better place for ROR," Gibbs noted. "Financial
advisers and others began saying maybe we can get it in real assets,
including timberlands and some types of real estate. So a lack of
anything else is driving a lot of people to the oil business right
the new money comes a renewed interest in cooperation, a recognition
that everyone has to win, according to Robert Pledger, president
of Swedish-owned Benchmark Oil & Gas.
to be that people were willing to drill wells with you but weren't
willing to cover the cost it causes you in running your business,"
Pledger said. "Now more companies say, 'Yeah, we'll joint venture
with you, and while we're not going to pay for everything, we'll
pay a reasonable markup.'
kind of the cost of doing business that people are beginning to
once again understand," Pledger noted. "They're saying we know this
takes a lot of time, and let's do this thing together."
clearly there is some infusion of capital into exploration activity,
some folks say there's work yet to do to convince investors to sink
their money here rather than the more sure-fire acquisition/development
reduced exploration risk significantly, but not enough to satisfy
the banking community and various financial organizations," Smith
said. "It still seems most of the big money sources -- big banks
and such -- are earmarked for acquisition, along with some drilling
if it's tied to production being acquired.
we're in a transition now," Smith noted, "where if prices stay high,
acquisition will stay slow, and in turn provide more money for exploration."
Bank on It
competition of multiple investors and investment vehicles on the
scene, Gibbs asserts the banks are having difficulty pushing money
out the door these days.
plenty of money to lend, and they're making capital available at
pretty good rates," Gibbs said. "If you have projects that need
financing for development drilling, this money could free up capital
for exploratory drilling."
having ample funds on hand, the memory of being burned in the past
is still fresh in the minds of the energy lenders at the banks.
Indeed, the modus operandi currently appears to be one of "aggressive
comes to senior debt, the banking industry is a little more aggressive,"
said Stephen Kennedy, senior vice-president and manager of energy
lending at Southwest Bank of Texas in Houston, "but we still stick
closely to the tried and true parameters used for years.
terms of the way we price credit facilities (interest rates and
fees charged) we're becoming more competitive, because there's a
lot more competition for investing," Kennedy said. "About half of
the funds we lend are for acquisition and about half are used in
the exploration segment for drilling wells.
loan is predicated on existing reserves," he continued. "They can
use the funds to drill, but repayment and collateral for that loan
and the cash flow for repayment are all tied to existing production.
slightly more aggressive with our structure and terms and much more
aggressive in the way we price deals," he added, "not just because
of the increase in the number of banks doing energy lending, but
also because of fewer acquisition transactions in the last 18 months."
bank debt provides capital, but it is not an actual investment in
a company, Kennedy noted. It takes a lower risk profile than mezzanine
or equity investing, with mezzanine being somewhere between bank
debt and equity in terms of risk characteristics.
once-high-flying power companies such as Enron, Dynegy and others
had groups to provide mezzanine financing, this type of funding
is more limited now. A few new players have come in, according to
Kennedy, and some private equity groups have stepped in to try to
fill some of that mezzanine space.
investors and banks, such as Southwest, participate in the E&P
equity arena by investing in equity providers like EnCap, which
recently completed investments from a $520 million fund. Kennedy
noted it has raised another fund, which stood at $825 million at
of companies they are funding are acquiring properties, but with
a lot of drill sites or prospects on them, so a lot of capital is
used to further develop those properties," Kennedy said. "This capital
is usually underpinned by existing production but not 100 percent
like with bank debt."
energy group currently has $1 billion in loan commitments in its
portfolio, with only about 45 percent of that actually doled out.
we're closer to maybe 60 percent," Kennedy said, "and I think this
is reflective of the really strong cash flow in the industry right
now; companies are more liquid than they have been. Still, you wonder
why there isn't more money flowing into the industry -- and why
there isn't more drilling going on."
voiced the now-familiar refrain echoing throughout the industry:
"Wall Street has rewarded companies through acquisition growth more
than the drill bit."
practice has the potential to come back to bite everyone, including
the market makers.
keep trading reserves," Kennedy said, "at some point the consumer
is going to wake up and find there's not enough to go around. But
Wall Street still isn't completely convinced we're on a long-term