After being “decimated” during the world financial crisis, project finance and mezzanine providers have returned to the market in a significant way and are “a great source of capital for E&Ps that can’t access the high-yield or second-lien market,” according to Paul Beck , executive director at Macquarie Metals and Energy Capital , Houston.
Speaking at Hart Energy’s Energy Capital Conference in June on the topic of nonconforming debt, Beck noted the potential for a capital comeback from farm-outs, which could make a “U-turn” upward in the next couple of years as a funding mechanism for exploration and production companies (E&Ps). But this time the capital won’t be coming from foreign oil companies and investors, as it did a few years ago. Those sources have mostly dried up. It will largely come from financial institutions looking for alternative ways to deploy project finance funding.
E&Ps are in need of capital, particularly given the increased focus on execution timelines for developing the shales. Development spending should increase in the near term on an absolute dollar basis, he said. Last year the E&P sector raised $153 billion, and Beck said projections are for that figure to top more than $200 billion annually over the next four to five years, with up to a $1 trillion spent in North America alone over the period.
There is a slight capex slowdown underway in 2014, however. In 2013, 75% of E&Ps said they would increase budgets; this year the number has dropped to 55%, according to Carnite Research. And some of that investment will be shifted into the downstream and midstream sectors to “handle the increased production volumes,” Beck said.
To assess capital needs among E&Ps, Macquarie studied the top 31 publicly traded independents (excluding the major integrateds). Together they represent a little more than half of the $153 billion spent last year. They are exceeding cash flow significantly, he said. Over the past four years the deficit has averaged $20 billion to $30 billion annually--“that’s $1 billion per company on average, a huge gap,” Beck said.
A vast private-equity market is adapting to the current E&P cycle by increasing its focus on projects and lessening its backing of startups. Rather, private equity is active in project-level investments and with repeat management teams. After peaks in fundraising were achieved in 2006 and 2009, these players again topped $22 billion last year and are expected to