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Companies still need to match the need for capital and the degree of risk tolerance to the type of capital the companies use.
The oil and gas industry is an industry that needs “insane amounts of capital,” in the words of one banker at IHS CERAWeek. Fortunately, judging by what many other speakers said during two financial panels at the Houston conference, capital is readily available. It is flowing easily within the U.S. from public markets, institutions and private equity, and from national and international oil companies abroad.
“The ability of the oil and gas industry, for the NOCs and the IOCs at least, to raise capital is unprecedented. There is a wall of money ready to come into North America,” said Bill Wicker, vice chairman investment banking, Morgan Stanley & Co. “It doesn’t flow to Mexico. It doesn’t flow to Venezuela. Not that much goes to Brazil.”
Tudor, Pickering, Holt & Co. managing director Maynard Holt put it this way: “Whatever size company you are, from a Statoil to a Noble Energy, and whatever your portfolio is today, you’d like to have more exposure to the North American resource plays. You view it as attractive, your investors view it as attractive, the private-equity guys say it is attractive. If I have money and I’d like to get risk-adjusted returns, where can I park it? Buy a Petrobras bond? The stable regime of the U.S. looks pretty good right now.”
One thing he is struck by, Holt added, is that investors now can see years and years and thousands of drilling locations ahead in the various shale plays, so they are very willing to commit. Companies with a market cap of, say, $1 billion, now talk of planning to spend $5 billion to drill all their locations. But uncertainty has become a thing of the past. Questions about having enough capital are passe.
That’s a good thing because the call on capital is enormous. The industry is approaching an annual spend of close to $500 billion just for development spending, according to James Wildash, a research director for IHS CERA who works with the firm’s buyside clients. There is $212 billion alone being spent right now to construct liquefaction capacity for the export of natural gas from basins worldwide. Some $300 million to $400 million was spent just on the first two exploration wells in the ultradeep-water Brazilian subsalt.
The amount of private equity is robust, according to Howard Newman, president and chief executive of Pine Brook Road Partners. “I don’t see any impediment in institutional capital going into private-equity funds. One thing that is anathema to a public company is volatility, but we in private equity don’t care.”
Newman and others noted that investment decisions need to be made based on the life of the oil and gas assets in play, not based on the life of the regulatory framework around them, or by government decisions -- or indecision.
For the IOCs and NOCs, long-term planning is key. “If you parachute into these majors (and I know, I was on the board of Texaco), you see it really looks like a construction company with a long-term horizon of four or five years to production. You may not be cashflow-positive until year six.”
Indeed companies still need to match their need for capital and their degree of risk tolerance to the type of capital they use. Said Holt: “These are often 10-, 20-, 30-year assets, so the assumptions a company makes about its costs and its pace of development are very important. What differentiates companies is their level of confidence in their ability to execute.”
All the skills involving shale development are now being transferred to the majors, Wicker said, and a mentality shift is taking place. The majors may have been late to the party, but they are catching up now and may end up consolidating the plays through more acquisitions and mergers, he said.
The question becomes, what is the right company to deploy the skills and capital to maximize the resource? Would ExxonMobil decide to build a gas-to-liquids plant in the Marcellus?
Contact the author, Leslie Haines, at email@example.com.