Energy Strategy, Technology, and Current Issues in the Oil Industry
Energy Overview / Current Issues in Energy

Susan Smith Nash, Ph.D.


Issue:
Current oil and gas exploration / production efforts hampered by insufficient cash / undercapitalization.

 
Operations are expensive, require ongoing drilling, completion, stimulation, restimulation, and infrastructure development, so they are often undercapitalized. Revenue flows are often insufficient to cover actual cash/operations needs.

It has been very challenging to maintain sufficient capital in shale plays because of the need to drill numerous wells in order to hold the acreage before the leases expire, and also because of the rising costs of drilling horizontal wells, conducting hydraulic fracturing, and managing water issues (sourcing, processing, hauling, disposal).  Further stretching budgets are “continuous development” clauses, which require operators to continue to drill a block of acreage rather than waiting to go in and in-field drill. Finally, steep decline curves and the need to re-enter the well and restimulate it (re-fracing, for example), further challenge operators and their capital resources.
 
For many companies, undercapitalization represents a severe problem.  For others, the undercapitalization of other companies presents an opportunity. Companies with cash and/or credit are able to purchase producing properties or leases from companies finding themselves in an undercapitalized situation due to accidents, the size of the play, rising costs, obligations arising from lawsuits (as in the case of the Macondo accident).
 
Examples include the following:
 
•    Companies purchasing “distressed properties” from companies that cannot meet their obligations due to cost overruns or financial difficulties of working interest partners.
•    Companies purchasing properties from companies that are forced to sell in order to raise cash to meet obligations. An example of this is Apache (see article).
•    Companies purchasing properties because companies cannot meet their drilling obligations, or find themselves in extreme cash flow binds. An example of this is Chesapeake Energy.
 
Reading:
 
Article:  Apache, known for buying undercapitalized assets from oil majors and making them produce more, has made several sizable acquisitions in recent months.
http://www.allbusinessinfo.com/apache-known-for-buying-undercapitalized-2875936
 
U.S. Shales and Resource Plays Can Lead a Resurgent U.S. ..... Still many companies too under capitalized to develop shale holdings
http://www.pioneeroilproducers.com/Meetings/PresentationArchive/POPS-Talk_2013-0318_Marko_TheRazorsEdge.pdf
 
Financing for Undercapitalized Companies
http://www.paragonfinancial.net/we-fund/undercapitalized-companies
 
Guiding Questions:
 
What does it mean for an energy company to be undercapitalized?
 
How does undercapitalization result in problems for some companies, but opportunities for others?

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Susan Smith Nash, Ph.D.
* 2013 *