SEEKING CAPITAL IN EUROPE: A STRUCTURED APPROACH

Oct. 22, 1990
Chris Tate MacLean & Associates London Independent oil and gas companies in the U.S. traditionally spend more time running the exploration and production sides of their business properly than they do seeking capital. However, the good old days are gone. The days of money chasing deals are no more. The U.S. government is not cooperating with its Tax Reform Act of 1986, and the banking system is in poor shape. As a result, independents are devoting a greater share of their time to raising

Chris Tate
MacLean & Associates
London

Independent oil and gas companies in the U.S. traditionally spend more time running the exploration and production sides of their business properly than they do seeking capital. However, the good old days are gone.

The days of money chasing deals are no more. The U.S. government is not cooperating with its Tax Reform Act of 1986, and the banking system is in poor shape. As a result, independents are devoting a greater share of their time to raising capital. In the process, some are discovering Europe as a potentially rich source of funds.

A company deciding to pursue capital in Europe must know where to start and how to proceed.

THE MARKET

If you have decided to consider European capital, first examine potential sources and match them with your capabilities of generating and administering deals, your track record, and your company and personnel.

Market segments in Europe are essentially the same as in the U.S.: individuals, retail (comparable to marketing in the U.S. through National Association of Securities Dealers brokers), oil companies, other corporations, and institutions (Fig. 1).

You should deal with European market segments comparable to those with which you have experience in the U.S. As the decision matrix in Fig. 1 shows, if you're used to dealing with individuals or the retail market in the U.S., you cannot leap over your threshold into selling to corporations and institutions.

In the short term, a U.S. company addressing a higher echelon can go down but not up. For example, a company used to dealing with corporations is perfectly capable of marketing to individuals and the retail segment. That's not to say that with time and track record, having been in Europe for a few years, the company couldn't target institutions. In the early years, however, you're much better advised to go after the markets that you're used to dealing with in the U.S.

Furthermore, a company able to address more than one market segment in the U.S. should focus on one segment in Europe. You should first establish a bridge head by targeting one segment. Once you've established some business in Europe and established a good reputation and track record, then you can expand on the number of areas you wish to address.

Timing can be critical, depending on market segment. Individuals, the retail segment, and the oil industry can be approached virtually any time. Corporations are more sensitive to the state of the energy business. And with institutions, pervasive market sentiment trends are very important.

WHICH COUNTRY?

Your market segment decision should help determine which countries to target.

Countries offering the easiest route of access to individuals are those with little or no regulation concerning advertising and the marketing of offerings. For example, you're better off marketing to individuals in countries like Belgium, Sweden, and Denmark, where people commonly put funds in overseas markets and where capital flight is normal (Fig. 2).

To target the retail segment, look for countries where there are independent financial intermediaries, such as the Netherlands, the U.K., and Ireland. Independent status is important because in many European countries-France and West Germany, for example-there are financial intermediaries tied to a bank or insurance company. These intermediaries sell only the products of the banks or insurance companies with which they have contracts. Independent financial advisory bodies similar to those in the U.K. probably won't become common with much of continental Europe for some time.

Prospects for marketing to the oil industry vary country by country. All European countries have at least a state oil company. The U.K. has the most developed and numerous private oil companies-many of them, interestingly enough, already possessing U.S. energy assets.

The privatization effect exemplified most by British Prime Minister Margaret Thatcher is spreading across Europe. With time, probably all national oil and gas companies will be denationalized. Thus we anticipate an expanding market in this sector.

Considerations in the corporate market are the economic health of the countries and thereby the level of corporate profits, some of which could be diverted into energy projects. Also important are tax provisions able to shelter profits. Therefore, the major corporate market countries to consider are the U.K. and Germany, both of which have had companies over the,past year reporting record profits and which offer tax advantages to those participating in energy ventures.

The U.K. and Ireland are distinct from the rest of Europe in the institutional market segment. U.K. and Irish institutions will consider a wide range of deals, from direct participation in projects, to bonds, to lease banks, to shares, to venture capital, to merger and acquisitions of assets and of companies.

In most of continental Europe, the institutions are much more conservative. This is allied to the region's lower rate of inflation and, therefore, the lower expectations of performance that the pension fund and insurance companies need to yield for their clients.

Much of the institutional money in continental Europe to date has gone into bonds, with a lesser amount invested in equities, and even less directly into oil deals.

PROJECT TYPE

What type of project is most appealing to each of the countries and market segments?

In general, exploration projects are most favorably received in the U.K. and Ireland, development projects in those countries plus Germany and Spain. All European countries are receptive to production acquisition deals.

Pipeline projects are most welcome in the Netherlands, Switzerland, and France. Equity deals are received best in the U.K. and Luxembourg.

Switzerland, Sweden, and France favor acreage banks, and most European countries are receptive to petrobonds. Wealthy individuals throughout Europe will consider most project types.

Fig. 3 ranks project types according to market segment.

Offering structures vary by country, too. The most suitable countries for limited partnerships are Denmark, Switzerland, Sweden, and France.

For individual joint ventures, prospects are best in Ireland, Portugal, and the U.K., and for corporate joint ventures, France, the U.K., and Spain.

The U.K., Ireland, and Finland welcome equity offering structures, while Portugal and Italy are the best countries for investment trust mutual funds.

Switzerland and Italy are the best countries for bonds.

TRADE GUIDELINES

In addition to market segment, country, and project type decisions, you must know which trades sell best to each market segment.

For individuals, there are no guidelines. You develop contacts and maintain 100% control of your sale, guided mainly by what the market will take and what the individual with whom you are dealing will accept. Remember, though, that all individuals want the sponsoring company to put some of its own money into the deal.

In the retail market you work through spheres of influence, basically brokers. These intermediaries need to become comfortable with you because unhappy investors will turn to them first. As a rule of thumb, at least 50% of project money involving the retail market should come from Americans.

Not all of that must come from the sponsoring company; some can come from the sponsor's officers and directors as well as other American companies and individuals. Nevertheless, the more the sponsoring company invests the more comfortable intermediaries will be. The sponsor's share should not be less than 10% of project expenditures.

Like individuals, intermediaries in the retail segment prefer turnkey ventures in order to limit their exposure.

Guidelines are the same for the oil industry and corporations. These market segments want Americans to provide at least 25% of the capital required, the sponsoring company at least 10%.

European oil companies and other corporations prefer that the sponsor's major profit center come after the Europeans have got their money returned to them; in other words, a small carried interest to casing point, with a 20-25% back-in after payout.

The other advantage of keeping the back-in until payout, as far as the more sophisticated investors are concerned, is that the structure acts as a controlling element on the total costs of the deal. Obviously, the sponsor/operator of the project realizes that if he keeps the cost of the deal to a minimum then not only does he get his money back and uses his own dollars most effectively but also he stands to reap the benefits more quickly when the project pays out.

As a global observation, the more money of your own in the venture, the more comfortable everyone else will feel. And a very positive marketing point in dealing with overseas participants is if the terms of the offering are exactly the same for Europeans as they are for American investors.

HOW MUCH?

The next decision concerns size of the deal you plan to propose.

For individuals, deals usually range from $5,000 to $1 million.

On the retail level, because of the cost involved satisfying the regulations and putting the offering together, you don't want to look at an offering less than $500,000, with a maximum of $5 million.

Industry partners generally don't look at much below $250,000, with a ceiling in the region of $25 million. The size of the company you're dealing with will naturally influence the size of the deal it is willing to consider.

As far as corporations are concerned, you are looking at the same range-$250,000 to $25 million-although the bulk of deals would be in the $500,000 to $5 million bracket.

With institutions, the minimum is $5 million, with a range up to $50 million.

PACKAGING

When it's time to package your proposal, remember that you must establish your company's credentials before prospective investors will consider your project.

Europeans in general view the U.S. as a safe place to put their money because of the size and development of its economy.

At the same time, you should realize that the energy business has had a bad reputation in the past, and the establishment and credibility of the company is the first and foremost issue you will have to face with each and every overseas contact you make.

Packaging the company must be done in an objective, pragmatic manner, in very much the same way that an oil analyst would review a company.

Prepare a 4-5 page report that gives the reader a good feel for the company in a very short time. Graphs or maps showing where your major fields and discoveries have been, numbers of wells, recoverable reserves, and production rates by year can be helpful.

If you have data on rates of return on your deals or finding costs per barrel by year, put them in graphical form. Where the trend is in the right direction they can be very positive marketing tools.

Fig. 4 shows a format for your company package. Fig. 5 contains guidelines for packaging the project.

The heading of the project proposal should tell readers immediately whether it's a drilling deal, a production deal, a gas pipeline deal, a bond deal, a lease bank, or whatever.

The executive summary should be a one-page, two-sided summary of the deal, including a brief description of the project, terms of the project, how much money is being requested, a brief summary on the company sponsoring the deal, and the projected economic returns.

It should tell why it is a good deal and why people should invest in it. It must be accurate, brief, and clear.

Following the executive summary should be the major information of the project. Include plenty of maps and graphs. You want to tell a story, building a picture of why, for example, this is a good place to drill. Make it clear how much money you're putting in and what costs will be, what fees people will earn. Nothing should be hidden from the investors.

The discussion and presentation of project economics are important. All inputs into economic projections should be clearly stated. It is a good idea to summarize within the text the projected economic returns expressed as return on investment, months to payout, and the internal rate of return.

The package should show the overseas investor that you've considered all the business aspects of this investment. And it should give the investor confidence that you're not trying to put too much gloss on the deal, that the project analysis is conservative in its assumptions, and that all elements have been reviewed.

Always assume that the decision-makers know nothing about the energy business. They are generally financial people.

ACCESSING THE MARKET

There are two approaches to accessing the market segment you've chosen.

One approach is to go to Europe, make a couple of contacts there, and pursue those and make a sale. This approach can and has worked, although success is rare. The alternative is to take a structured, methodic approach.

The first step in the structured approach is to identify marketing channels. One such channel is your own business contacts. Another is a data base that you can develop by buying lists or from directories. You also can advertise in business papers and magazines.

Use these marketing channels to develop a mail list, then make regular mailings to your prospects.

Don't try to cover too many things at one time. In your first mailing you should essentially introduce your company, briefly explain why it is a good time to be in the energy business, and perhaps add a corporate profile. In the next mailing you could develop the theme by putting in an executive summary of a particular project.

Once you receive responses, arrange meetings and follow them up.

A fourth marketing channel can be centers of influence. Examples are pension advisers in the U.K., bankers in West Germany, and lawyers in Denmark. The costs of marketing overseas are significant so it makes sense to tap into such centers of influence early in your marketing campaign.

Conferences and seminars can be another way of accessing a relatively large number of people in a short space of time. Because of the time and money required in organizing conferences, it makes sense to participate with a group, perhaps joining four or five other companies interested in the same country.

FINAL THOUGHTS

As in all ventures, there are definite killer mistakes to avoid in pursuing capital in Europe.

Don't, for example, waste potential investors' time. Make certain that, at the end of a presentation, your prospects know what action they can take.

Don't try to cover too much in one meeting. Keep meetings brief, concise, and to the point.

Don't employ the hard sell or settle for anything less than your best possible presentation of your company and project.

Don't use slang expressions, attempt to converse in a foreign language in which you are not fluent, or dress sloppily.

In summary, your aim should be to demonstrate the high quality of management and track record of your company in project development and to explain your company's competitive advantage.

Prepare a structured, focused marketing program, and stick to it methodically, avoiding the temptation to spread your efforts across too wide a spectrum.

Package the product accurately and concisely, and demonstrate total executive commitment to the project. Practice proactive management, and avoid the killer mistakes.

The major effort required to coordinate and manage a structured approach to raising European capital will be worthwhile and very rewarding in the longer term.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.