Contribution of Drilling Funds and Private Placements

Abstract

Introduction Drilling funds and private placements are similar in intent; that is, both are financing techniques used by the oil industry to attract capital from the public in order to drill and explore for oil and natural gas. Companies that have built up large reserves, such as the motor oil companies, did not use these techniques in the past but relied on internally generated capital, debentures and stock offerings, and bank and insurance financing. But the capital gap in the industry has caused all segments of the industry to re-evaluate their thinking and possible biases and to consider the oil programs and private placement opportunities. PRIVATE PLACEMENTS PRIVATE PLACEMENTS We all have witnessed the small oil operator promote his deeds through the years. Some historically promote his deeds through the years. Some historically tried to joint venture using private placement investor money to pursue drilling deals. It was pretty easy in the 40's and 50's when the industry had available large acreage blocks, seismic data, drilling budgets, dry-hole budgets, bottom-hole budgets and acquisition money. A well could be drilled pretty cheaply if an acreage position could be obtained among several competing major or independent oil companies. But the good old days of vast major company leaseholds with generous dry-hole budgets and acreage contributions, together with the geological and geophysical information, from which an independent could develop drilling deals, dried up in the 1960's. The big independents and the majors went "elephant hunting" offshore and abroad. Inflation and depressed crude and natural gas prices reduced the profitability of domestic operations, causing large private investors to abandon the oil industry in favor of better profit potentials elsewhere. The 1960's were bard times for the oil industry. Mergers and acquisitions became the way of survival for both the independents and majors alike. The capital gap increased to the point that domestic exploration almost came to a comparative standstill Without investor money to supplement the lack of major and large independent drilling activity, production/reserve ratios narrowed and an energy production/reserve ratios narrowed and an energy shortage steadily increased. Neither the majors nor independents could consistently show profits on domestic exploration for their stockholders or investors. Private placements practically dried up. CAPITAL GAP The burden of finding large domestic oil and gas reserves for this nation has been laid at the feet of the oil industry. We must meet the energy crisis head on, roll up our sleeves, and go about the business of Ending and producing every barrel of oil and Mcf of gas that can economically be found for the benefit of the citizens of this country and to help offset the energy deficits that will be accumulated every year. Just think, during the rest of our business careers, we will never know domestic oversupply again, the fundamental cause of all the adverse conditions that beset us in the 1960's. Today, with prices rising rapidly and creating the profit incentives necessary for increased domestic exploration, pessimism is turning into optimism again. But we find the majors trapped in a capital short position, domestic offices closed, and the necessary geological and technical staffs either disbanded or dispersed throughout the world. What the oil industry had been forecasting has come true. There is a capital gap besides the energy gap, as illustrated by one major company's financial rating being reduced recently from AAA to AA because of an increase of their debt ratio to reserves. The risk capital requirements are far greater than the petroleum industry can meet with internally generated funds. The majority of the independents have been dormant for so long that most have depleted themselves down to small operating companies. The big question is, "where is all the money coming from that will be necessary to get the oil business humming again?" Of course, a lot of wells are drilled by oil companies that plow back a part of their revenues each year or promote prospects within the industry, but the majority of the financing for exploratory wells drilled by independents historically has come from the public, who are attracted to the potential profits because of the leverage obtained by the intangible drilling deductions against ordinary income. P. 39