It’s no secret that the oil and gas industry can be a tremendous moneymaking opportunity, but breaking into the industry presents serious challenges. In particular, many industry neophytes struggle to attain the proper financing to get a project off the ground. For newcomers in search of oilfield financing, the last few years have brought mixed news. While traditional financing has become increasingly harder to come by, other funding channels have opened up to include a wider and more diverse range of options. Beginning a new oilfield project remains a challenge, but with some resourcefulness and a solid business plan, the following financing options can get the ball rolling.
Bank Loans
Perhaps the most favorable of oilfield financing options, bank loans are often the first choice for many ventures. The appeal is obvious, as traditional bank loans generally offer borrowers more reasonable terms and a higher degree of flexibility than other financing sources. Bank financing often comes with convenient drawdown options, providing a necessary line of credit without the burden of excess debt and interest costs. Repayment schedules may also be more flexible and forgiving, which is an important asset in an unpredictable and volatile industry. Bank loans also provide a relatively streamlined and reliable process for immediate short-term financing needs, which may be less practical with other funding sources.
However, due to the high-risk nature of the oil and gas industry and an oil market gripped by uncertainty, most banks are hesitant to grant loans to all but the largest, most well-established companies. A new oilfield project is unlikely to secure much, if any, of its financing through a traditional bank. Such loans may also come with attendant business requirements that may be burdensome or difficult to comply with, and so may not be an appropriate choice for all ventures.
Professional Investors
With bank loans difficult to come by, many new projects turn to professional investors to secure necessary financing. This includes both angel investors and venture capitalists, and each comes with its own set of advantages and disadvantages. Angel investors are appealing because they often offer quicker access to funds, they eliminate the hassle of repayment plans and the burden of interest and they don’t require collateral. Investors with industry experience may also prove to be an invaluable asset to a fledgling venture, providing much-needed consulting and strategic guidance. However, this comes at a cost in the form of giving up a share of the business. Angel investors may also lack the structural support of a larger firm, and finding the right investor can sometimes be a long and laborious process.
Venture capital is another frequently-used option, particularly for undertakings that require larger sums of capital. Venture capitalists often bring a wealth of experience and may provide useful connections to facilitate a business venture, and an investment from a well-respected venture capitalist firm may help to secure additional financing if necessary. However, VCs typically expect to take on a more formal relationship with their investments, often including advisory roles, preferred stock shares and other considerations. This makes it crucial to understand the VC, the value they have to offer and the capacity in which they expect to serve before reaching any financing agreements. Venture capitalists also commonly work on shorter time scales, which may create undue pressure in an industry with a generally longer-term outlook.
Alternative Lending
While traditional bank loans may be increasingly difficult to find, alternative lending has become a thriving source for oilfield financing in recent years. Alternative lending is an umbrella term that encompasses a variety of non-banking lending platforms, including factoring, hedge-fund lending, unsecured business loans and more. The greatest advantage of alternative lending is availability – while most traditional banks approve less than 20 percent of the loan applications they receive, many alternative lending sources have approval ratings of 60 percent or more. Alternative lending options are also typically highly automated processes that require less paperwork and are subject to fewer regulations, making them far faster and more adaptable than bank loans.
It’s not a perfect solution, however, as borrowers can expect to pay substantially higher fees and interest rates. The maximum financing available is also generally far lower than from other sources, and most alternative loans come with shorter terms that may limit flexibility. Additionally, alternative lenders often expect more frequent payments than banks, which can cause problems for ventures that aren’t expected to generate a significant cash flow in the short term. While these alternative funding sources are worth exploring and may be appealing to those who can’t qualify for traditional loans, the often-limited capital and emphasis on short-term, high-interest loans make them less than ideal for most oilfield ventures.
Ultimately, there is no magic bullet when it comes to financing a new oilfield project. The industry is one of high risk and enhanced volatility, and many lenders simply don’t have the appetite for such high stakes. Nonetheless, the sheer diversity of options means that capital is often available through one avenue or another, and new lending options appear regularly as investors seek a piece of the ever-growing energy industry.
