The funding of emerging oil & gas companies is less straightforward than other start-ups due to the inherent risks associated with drilling for oil and taking any successful drilling programmes from exploration stage through to the production of oil &gas.
Debt finance, essentially borrowing from banks, is usually dependent upon a guaranteed revenue, so is normally only a funding option once production has commenced. Therefore, equity finance from the issue of shares is usually the most viable option and there are some providers of venture capital who will look at providing private equity to new-start oil companies.
It may be that existing shareholders can provide the company with sufficient capital to fund initial seismic research which is essential to have prior to the next phase of the exploration (i.e. drilling). Thereafter, with positive seismic results it can seek investment from venture capitalists. However, as a result, an element of control is likely to be ceded to the investor, who is likely to impose some controls and appoint at least one director.
Another potentially attractive alternative to private equity finance is flotation on the Alternative Investment Market (AIM). This option may be particularly suitable for a small oil and gas company looking to expand relatively quickly. AIM represents a less onerously regulated alternative to the main market. The benefits can consist of increasing capital, providing options for acquisitions (AIM shares may be used as an attractive form of payment), and gaining publicity.
There are some other more innovative ways of financing small oil companies such as disposing of proportions of awarded licences to larger players – retaining small interests and realising cash as a result. Some small companies have also financed drilling by sharing the drilling risk (and thereafter the reward) with the drilling contractors. These types of funding are becoming more attractive given how difficult 'conventional' funding is at this early, high risk stage.
Once reserves are proven after drilling, debt funding is normally an option and several UK banks have dedicated oil and gas teams which specialise in funding this type of company.
Helen Dickson is a partner specialising in Corporate Finance with law firm Shepherd and Wedderburn. 01224-34 3554.