Something Huge is Headed Our Way
Another Thursday…another airport.
For the fifth week in a row (or is it the sixth?), I am traveling as you read this. Marina decided to stay home this time, so I’m doing this one solo.
There’s no reason to panic though. Marina saw to it that everything I needed was packed and ready to go.
The meetings that begin today are very significant. In fact, I’d call them huge. They are one of the final steps in a move I have been structuring for the past several years.
The result is going to be a major new opportunity for individual investors in valuable oil and gas assets.
You see, a breakthrough is about to occur…
At its core, it has to do with access. And I expect to be telling you about these developments over the next month, so stay tuned.
These changes are going to provide you with the opportunity to make a great deal of money.
Because if matters unfold the way that I expect them to, you will have direct access to the kind of low-risk, high-return investment plays that are normally left to the big guys.
There are a few details left to iron out, so I need to save the particulars for the unveiling. But today, I want to give you the background on what is about to happen without, I am afraid, “spilling any of the beans.”
After the Market Carnage
As you know, the oil and gas investment market has been changing over the past several years.
What has emerged is a very different way of estimating and packaging oil and gas assets than what previously existed during the pull back from the price heights in 2008.
By the time we had finished that roller coaster ride – essentially four years ago this month – many of the fields and the projects on them were left in a shambles. The collapse in prices had rendered most of them unprofitable and in many cases the small companies clinging to them were consigned to the bankruptcy line or gobbled up by bigger fish.
One of the more interesting results to come from this carnage was the way in which production deals were to be financed moving forward. That’s because only the smallest projects could be funded from company proceeds or investment escrow accounts.
Anything else needed access to much larger sources of cash.
As I have written previously in OEI, the locus for that financing has moved from places like New York to London. For field projects worldwide, more money is raised within a three-mile area surrounding Liverpool Station than anywhere else in the world.
Known as the “City”, this London financial district is where a company, its fiduciary representatives, or its lawyers come to strike deals; often all of them at the same time.
But in the aftermath of the credit crunch, there are changes afoot.
The collapse of interbank credit has caused the downfall of the primary way of funding projects and one of the main reasons all of us were tracking to London.
They are called syndicated loans.
In such an arrangement, an operating company secures a loan to develop its field, essentially using the value of the oil to be extracted as collateral. That collateral value is typically conservatively set by both the company and financial institution through a deliberate underestimation of the volume to be produced and the price it will fetch at the wellhead.
In this arrangement, both parties fully expect the actual result will be better, thereby providing a certain amount of protection against unexpected market turbulence. The point bank then lessens its exposure by selling portions of the loan to other banks, spreading out the risk through syndication and picking up syndication fees in the process.
But by October 2010, I realized this standard method of finance for well-run, midsized companies with successful production track records was coming to a crashing end.
A Better Deal From Tony Soprano?
It happened at a meeting in London’s “City” involving a point bank and a very solid African production company.
I had known the company’s management for some time and they asked for my advice on structuring the deal. This would mark the third time the company and the bank were to have worked together on the same type of syndication.
The company was well-regarded by the bank, coming in under budget and over projected production on the two previous occasions. Each of them had provided the bank with nice syndication fees in addition to a return on its money.
It seemed like an easy enough job on a nice stress free trip to London. Unfortunately, it didn’t work out that way.
Despite being one of the bank’s best customers, the offer was six month LIBOR (London Interbank Offered Rate) plus 1,295 basis points. That worked out to an annualized interest rate approaching 14%…for a known, valued, customer!
I advised the client not to take the deal and may have said something about be able to get better rates from Tony Soprano.
What was happening, of course, was that the interbank lending market was drying up because of the credit crunch. Banks were not lending to each other, which meant the guys I was facing across the table could not syndicate the loan since other banks were not going to participate.
That left them with only one option: Cover their exposure to heightened risk by charging a much higher interest rate.
Ever since that rainy Tuesday morning, I have been searching for another way to finance these types of deals.
One of the Industry’s Most Sweeping Changes
Of course, deals like this are still financed in other ways. But they rely heavily on an operator’s current production flow. That is doable while prices are high, but even then it doesn’t work in all situations.
My search took me through several options and variations. However, the result would usually require an ad hoc way of doing things for each venture. Once again, the majors had access to capital but the companies that actually could bring in smaller fields at greater profit were finding it difficult to access money.
Fortunately, that is about to end in one of the most sweeping changes in the field of finance. The source of those funds will progressively move from those bankers in London to a very unlikely source.
In a few weeks, significant revisions in regulations will allow average retail investors access to these financing projects. Of course, those changes will also open the doors to all manner of shady offers and not a few outright scams.
That is why you had better be reading Oil & Energy Investor. I’ll be advising on this new development right here, pointing out the pitfalls and explaining how you can distinguish the genuine deals from the schemes.
But there is also something else headed our way.
I have been meeting with companies and finance folks for almost two years, developing a way to insulate individual investors from high risk and structure deals more likely to produce cash flows quicker.
The plan is almost finished. And when we are ready to move, you are going to be the first to know.
It may well change how you look at oil/gas investment forever.