Oil & gas consulting
The oil and gas industry is a diverse industry that underpins many national economies. In this video, Dan focuses on the different sources of financing that are available for businesses within the upstream sector.
The oil and gas industry is a diverse industry that underpins many national economies. In this video, Dan focuses on the different sources of financing that are available for businesses within the upstream sector.
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13 mins 6 secs
The Upstream sector involves developing fields in pursuit of commercially viable hydrocarbons. To achieve this, E&P companies are financed by stakeholders such as major IOCs who aim to pay out dividends to their shareholders. Further to this, investors, prior to financing, look for projections to determine viability, and this is enabled through reserve reports.
Key learning objectives:
Explain the stages of the upstream sector
Identify the different stakeholders involved and the risks they take
Discuss the different sources of financing and the impact of reserve reports when making an investment decision
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During the exploration stage, there are no discovered hydrocarbons yet and volumes are considered prospective. When drilling, the result is either strike oil or encounter a dry well. At this stage, the certainty of the outcome is at its lowest and subsequently the risk is large.
The risk profile is reduced during appraisal drilling as the oil or gas has been proven to be present.
At the development stage, it becomes clearer and the certainty of outcome is increased. During this stage the project is de-risked through further engineering, finalising commercial contracts and securing financing to construct and install infrastructure, prior to operations.
International Oil Companies (IOCs) – These are typically distinguished by multi-billion-dollar market capitalisations with a global presence. E.g. Exxon Mobil, BP and Shell. These companies are long-term focused and ensure strong cash flows to pay out dividends for their shareholders.
Mid-cap/Independents – Their core expertise is focused on exploration and production. They will attempt to target geographical regions or certain phases of the development cycle. These are generally entities listed on main stock markets. E.g. Tullow, Cairn and Premier.
Private-equity backed independents - These entities will focus on specific geographical regions or target a certain type of project that fits the overall investment thesis. Each private equity house will look to either IPO or sell their share over the long-term.
Small-cap explorers – Focused on exploration and have limited to little production. Their focus is to prospect and discover hydrocarbons to bring in a larger player to develop the field. However, companies will often have limited cash-generating operations. E.g. Kosmos, Eco Atlantic.
National Oil Companies (NOCs) – They represent and manage the host nation’s interests in the development of their natural resources. The NOCs hold the majority of the world’s hydrocarbon reserves. They traditionally partner with majors to jointly develop fields. E.g. ADNOC, Petrobras.
Reserves report - independently determines the commercial viability of the project or wider organisation to service debt obligations or produce a sustainable and attractive equity return.
The report is used by company management, financial institutions and equity investors. Equity investors will consider Proven and Probable Reserves and may take a view on Contingent Resources as these volumes will represent the potential future growth story of the E&P company.
Field life is also considered which impacts financial ratios and debt tenor. Lenders will want to ensure that loans are repaid whilst the field is still economic.
Different types are available depending on the stage within the project lifecycle:
Exploration and appraisal – Given there is no discovered HC, at this stage, the company will:
Development – Capital intensive and requires a large investment via:
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