Funding for Small Oil Cos in '09 Scarce, Costly

LONDON (Dow Jones Newswires), December 3, 2008

Funding for small to medium-sized oil and gas companies will remain scarce in 2009 and when capital does begin to flow it will be expensive, senior energy bankers said Wednesday.

"Today, markets are shut. There is no high-yield paper coming to the market," said Michael Powell, head of oil and gas and Barclays Capital at the World Junior Oil and Gas Congress in London.

Debt markets may begin to reopen in the first quarter of 2009, but only for high-yield paper at a cost of around 15% for small oil and gas companies, he said. "If your debt costs have to start to think differently about funding options," he said.

Small companies must, "budget to survive," said Simon Ashby-Rudd, Managing Director of specialist oil and gas investment bank Tristone Capital. "If there is a perception of financing risk for companies today, investors will simply run for the door. That's the position Oilexco found itself in," he said.

Shares in Toronto-listed Oilexco Inc., which is very active in the U.K. North Sea, have fallen more than 80% since the beginning of August after a number of financing difficulties.

"None of us should count on capital markets opening in the next six to 12 months," said Paul Colucci, managing director of investment banking at Thomas Weisel Partners. Companies likely to run short of cash during this time should consider selling stakes in their fields, doing deals with private equity firms or selling companies outright, he said.

The bankers said they expected the number of acquisitions in the sector to increase next year. "Most of the (oil) majors have a significant amount of cash," and are potential buyers, said Ashby-Rudd. "There is a huge amount of sovereign money out there looking to invest," he said. Ten to 20 private equity firms have between $250 million and $1 billion and are looking to acquire groups of small oil and gas companies, he said.

There is value in the sector, Ashby-Rudd said. "If you buy an asset in the market today, in three to five years you will make money," he said.

Buying a standalone oil or gas producing asset in the North Sea right now would cost around $20-25 a barrel of oil equivalent of reserves, versus around $8 a boe of reserves to acquire a North Sea oil producing company outright, he said.

But the oil and gas companies that do have cash are likely to remain cautious in the short term, said Powell. "It's tough to figure out what value is," in the current market and, "people in a position to make an acquisition still don't know what their view is around the oil price."

"(Companies) are also watching their cash position very carefully," Powell said. "Financing has become a strategic issue," and it would be foolish for a company to rush into a deal now that would leave them facing their own financing problems in six to 12 months, he said.

Total SA appears to be echoing this sentiment. U.K. newspaper The Times reported Wednesday that the French oil giant has decided against bidding for Canada's Nexen Inc. because the deal would be too risky in the current economic climate.

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