3 Questions to Consider When Securing Capital in the Oil and Gas Sector
As we enter another year of the pandemic and the potential for instability that implies, oil and gas companies are looking to bolster their financial health. One of the biggest factors in being able to manage through and get ahead in 2022? Access to capital. Whether you’re upstream, midstream or downstream, your ability to raise money will impact how you’re able to reach your potential this year and in the future.
To help companies uncover the path to financial sustainability in 2022, we’ve answered three of the most frequent and important questions around access to capital we are hearing from executives in the oil and gas sector. We recognize that each energy industry segment has its own issues in financing their companies. For example, upstream companies face financing assets that are depleting. Midstream operators have gathering and processing contracts that can define their future cash flows. While downstream operations have large capital expenditures coupled with large working capital needs.
Question 1: I need to raise capital — what should I prioritize and where do I start?
Whether you’re talking with lenders for debt capital or looking for equity investors, there are certain things you can do to put your organization in the best position to attract that capital you need. In this vein, we would recommend approaching numerous capital and service providers who have been consistent in doing business with energy companies. Not only is the energy industry highly cyclical, but it is also looking at potential government headwinds in terms of new regulations and more oversight on providers of capital to the energy industry.
While it’s undeniable that there is a lot of investor focus on the renewable energy sector at the moment — more on that further down — it would be a mistake to think that’s the primary factor they consider. For most lenders and many investors, presenting a robust business plan, well rounded management team, strong balance sheet, a demonstration of commitment to proper cash flow management and strong returns on invested capital can be the deciding factors on securing the capital you need to keep on going.
The current quality of your balance sheet and your grasp of cash flow management paints a picture of your company’s future. Just providing a reserve report, receivables aging or other asset value reporting will not secure your company’s future funding if it is not presented with cash flows that show an ability to repay or provide cash capital returns to lenders or equity holders. Evidence of financial strength helps assure lenders and investors that your company will be able to weather challenges, seize opportunities and keep pace with the competition.
In recent years, an environmental, social and governance (ESG) program has become a necessary component of that picture as lenders and investors place greater value on the enduring sustainability of businesses. Many subscribe to the growing belief that companies’ approach to ESG issues influences long-term resilience, reputation and ROI. A recent Morgan Stanley study indicates that 85% of U.S. investors are interested in seeing a company’s ESG disclosures. Oil and gas companies are seeing the same trends occurring — the 2022 BDO Energy CFO Outlook Survey found that 46% industry CFOs are pursuing ESG initiatives to address investor and board demands. As stated earlier, this can be a difficult proposition for an industry that relies on a depleting resource. Therefore, the focus can not just be on sustainability. A company must look at its service providers, a potential end of project reclamation plan or a more diversified Board of Directors to enhance its ESG program.
Question 2: How do I balance ESG with other priorities in raising capital?
Balance is easier to achieve when ESG is baked into overall corporate strategy. The implementation of an ESG program is not only an avenue to raising capital and maintaining stakeholder support, but also an increasingly strong indicator of financial stability.
And the industry is, by and large, on board. More than two thirds (68%) of oil & gas CFOs in the 2022 BDO Energy CFO Outlook Survey said that they believe implementing an ESG program will improve resiliency and positively impact their long-term financial performance.
The capital markets are zeroing in on ESG initiatives on a broad scale. It’s an area that is attracting dollars, with many reports showing that companies with strong ESG programs seen as carrying lower regulatory, legal, reputational and political risk than companies with low ESG ratings.
This area is under the spotlight at the moment, with regulatory bodies such as the SEC creating ESG task forces to ensure proper governance. Beyond an expected increase in reporting requirements, by optimizing ESG initiatives, there are other expected benefits, such as improved ability to attract and retain talent, improved relationship with surrounding communities, improved bottom lines, and — importantly — a more attractive pitch to lenders and investors.
Question 3: What’s the best approach to building renewable capabilities?
An important piece of ESG is the environmental factor. For the oil & gas industry, this element carries with it huge implications. While the popular conversation has centered on the shift to renewables, the share of total energy consumption provided by fossil fuels has barely budged over the past 10 years, according to the Renewables 2021 Global Status Report.
However, while it hasn’t been a monumental shift — at least not yet — many oil & gas companies are thinking about diversifying product offerings and are looking more closely at renewable energy targets for potential acquisition as a shortcut into a new space.
Some oil and gas companies may think that simply acquiring a renewable business or integrating renewable power into existing processes will make them a renewable energy company. However, renewables are not a perfunctory addition. Building those capabilities should be part of a cohesive strategy with specific, measurable objectives, such as protecting current revenue streams, expanding products or services, gaining market share, improving capital access, capitalizing on specialty areas and more. The strategy should also be tailored for the specific geographies where your company operates and include all relevant compliance considerations.
Companies should also look to their service providers for ESG opportunities. In the upstream space, for example, are drilling wastes being disposed of properly and is rig sight equipment being run on diesel fuel or well head gas? For midstream operators, are the line compressors being run by electricity or solar power? We recommend companies check their accountant and law firms’ ESG plans.
Currently, oil and gas companies have an especially thin margin for error. As shown in BDO’s 2022 Energy CFO Outlook Survey, 62% of oil and gas companies are not profitable or are just breaking even. Volatility in oil prices and production, as well as shifts in demand, have impacted balance sheets and exacerbated uncertainty. Despite these headwinds, the oil and gas sector remains the dominant strength of the energy industry, and companies that make the right adjustments while maintaining financial efficiency will be poised to thrive in the years ahead.
Industry-wide challenges present an opportunity for oil and gas companies to prepare for future success by investing in their energy transition. Our CFO survey finds that 42% of oil and gas companies are growing an existing business line to add a renewable offering in 2022, and 46% are launching an entirely new renewable business line. There is currently support for alternative energy adoption at the federal level, so timely action as part of an overall strategy can help protect current revenue streams and open new ones as well.
Companies with capital to deploy can assess whether to build or buy renewable capabilities that help bolster profitability and capture new market opportunities. They could develop new infrastructure or acquire assets that help scale and improve efficiencies. Strategic partnership with a renewable company may also be an option without the complexities of an outright acquisition.
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