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The reason these large private independents do not need public capital is because there are large amounts of private investment capital available through private equity investors and/or joint venture partners. In fact there is more money looking for a home than there are opportunities for investment. Any company can access directly the same funds and portfolios that investment bankers access, and without paying the banker's exorbitant fees. To easily access these funds one must have a verifiable track record and a large inventory of similar type investment opportunities. The wonderful part is that these funds are even more accessible in down turn economies, as the fund managers are more intent on finding higher rate of return investment opportunities during down economies.
Our industry has become more risk adverse in this past decade more so than anytime during the entire evolution of the industry. There is no doubt that our industry needed to learn how to make smarter choices, to learn to better apply advanced technology to help make more informed decisions, which all work together to reduce the inherent risk exposures. But most, if not all, of the large discoveries during our lifetime, would not have been found without taking enormous risk. If the pressure to conform to the street's expectations isn't enough to cause our industry to be more risk adverse, Congress has responded to the public outcry over Enron and Worldcom with the Sarbanes-Oxley Act, which now places criminal liability exposure on the officers and directors of any public company. Instead of dealing appropriately with the offenders, they have chosen to punish the 98% of the companies that have a track record of doing things right. So the cost of the new documentation and implementation or in-depth reporting procedures gets added and in essence raises the bar on the actual "cost of capital" for public companies.
I think our industry has failed to truly appreciate that the world cannot exist without fossil fuel energy, at least not in the short term. Energy is what brings our country security, a high standard of living, a secure economy to the US and the world, and has made America the force it is in the world today. The simple fact is that the world can't exist, as we know it, without sufficient quantities of oil and gas and it is TOTALLY dependent upon our industry to make the necessary effort to replace depleted reserves by the finding of new discoveries around the world. There is a cost for that security and economic stability and the oil industry should not be expected to replace the reserves, absorb the high inherent risks of the industry, provide world economic stability without some form of compensation or consideration; for which our industry does NOT receive sufficient consideration in tax benefits, commodity price protection, or bring premium prices for our public shares.
Public companies also become subject to a lower evaluation as to what our company's equity is worth, and every public oil company that exists is undervalued because if their properties were sold in a competitive auction today, they would bring substantially more value than is reflected by the current stock price. Every company that has sold non-strategic properties at auctions have been shocked at the high prices received for those properties. Imagine how shocked they would be at what they would receive if they sold high valued, strategic assets on the auction block! Anyone that has ever looked at acquisition and merger transactions recognizes that one cannot evaluate an oil and gas entity based upon accounting financial information, as that information will always reflect a lower value than market value.
Historically, when oil and gas prices are extremely high or low, the acquisition/merger marketplace is almost non-existent. When oil and gas prices are extremely high, the economy usually suffers due to the many industries that are detrimentally affected with high fuel costs. When the economy is in a recession, the public capital markets are almost non-existent as a source of capital. Usually in high commodity price periods the industry activity levels are extremely high as cashflows provide a large source of available capital for drilling investment opportunities. The past two years have been an enigma, due to the fact the economy has been somewhat depressed, which has caused most public companies to be more concerned with their declining stock values and have resulted in their paying down indebtedness with the excess cashflows rather than invest in drilling opportunities. So what does that tell us about what to expect for the future, if we truly believe commodity prices will increase in the long term? What are your plans for accessing capital in a down market?
The bottom line is our industry has great importance to the world and is paramount to national security and the world's economy, and its company's shares are greatly undervalued in today's marketplace. As an industry, we must devote more effort and capital to exploration and development than towards acquisition and mergers. Every acquisition/merger prospect must have geological purpose, and not merely financial. We must place more emphasis on using technology to reduce risk, but not make our focus to avoid it. We can't ignore the fact that whether our funding comes from private or public sources, there must be a return on capital.
The company's that will be best positioned to take advantage of an advancing oil economy, will be those that are well postured to access private capital and have a large inventory of drilling prospects. The long-term outlook for the public capital markets will only continue to be plagued with more expensive regulatory constraints and controls and a higher cost of capital, if it is even existent when needed.
If you are a private company and would like to explore opportunities as to how best to posture your company to access private capital in lieu of attempting to access the public markets, or simply to re-evaluate your company's business plan, CEC Energy Consultants would be happy to help you explore opportunities that might help you better posture yourself to take advantage of an advancing oil economy, and help you see your equity valued closer to true market value.
Best Regards,
Mike Cherry, P. E.
Back to January 2004 Newsletter
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