Capital still accessible for the energy industry

Jason Reimbold
DivestPro Energy Partners

Despite dismal market conditions, capital continues to find its way onto the industry’s balance sheet. Amidst the news of bankruptcies, low commodity prices, and tight credit markets, there have been some positive headlines come out of our sector in recent weeks—and not too soon. In fact, a number of companies have accessed more than $3.0 billion during 1Q09.

The energy industry is weathering the economic storm better than many other sectors, and there seems to be long-term optimism for the industry demonstrated by our continued access to capital—albeit if that access has been somewhat limited.

Security offerings and, yes, even bank debt have supported the needs of companies feeling the pinch of low commodity prices. However, these are not the instruments providing capital to the industry. Private Equity is getting their piece of action as well.

In January of this year, Quantum Energy Partners funded Primary Natural Resources III with more than $100 million to be used for acquisitions. The following month, GE Energy Financial Services committed to a $150 million investment into a partnership with ATP who will own and operate a deepwater production unit in the Gulf of Mexico.

Additionally, companies including Ellora, Williams, and Encore have also been successful in maintaining much needed access to capital by reaffirming borrowing bases and through private offerings. Other announcements in recent months included Senior Note offerings by Denbury and Chesapeake. See Table 1 for more information on recent financings.

News of these first quarter funding amounts do not exactly call for celebration, but it does support cautious optimism, and these days, we need all the good news we can get.

Nonetheless, whether your view is optimistic, or somewhat less-than-optimistic, the ability of companies to raise money, given the current state of the market, suggests the capital markets are not quite as “tight” as we believed.

While this is positive news for the industry, there are sure to be tough times ahead. Not all companies will be as successful in accessing capital as the aforementioned, and there will almost certainly be more news of bankruptcies, workouts, and reorganizations. Still, this could be an opportunity to build the foundation for future success.

A good mix of reducing expenses and selling non-core assets can improve the balance sheets of many companies, and further support can be realized by taking advantage of lower drilling costs in order to convert PUDs into PDPs. It’s up to the management teams to develop a sound strategy for capturing value in what could be a target rich environment for lower-cost development and acquisitions.

Ultimately, the market is showing us that capital is still available to our industry, and this should translate into long-term growth. OGFJ

About the author

Jason Reimbold serves as director of DivestPro Energy Partners. In 2005, Reimbold founded www.GlobalOilWatch.com, an energy research portal for industry analysts and investors. In 2007, he co-authored The Braking Point: America’s Energy Dreams and Global Economic Realities (www.thebrakingpoint.com) with Mark A. Stansberry.