The Feasibility of Economic Leasing in the Oil Industry - An Equipment Analysis

Abstract

Abstract This paper presents a complete analysis of the economics of leasing equipment by the petroleum producer. Using the basic premise that capital which is freed by leasing equipment rather than purchasing outright can be put to more productive use, graphs are presented to illustrate economic conditions which occur when the operator leases equipment. Both the major producer who might have large amounts of capital readily available and the smaller one with limited funds may be financially aided by equipment leasing. In the first case, the capital freed by leasing production equipment can be used more productively to discover or develop additional reserves, rather than as the advance payment for the future use of a capital asset. Secondly, since equipment leasing extends virtually 100 per cent financing to both, the small independent has the use of needed equipment without the over-extension of bank credit or the possible dilution of equity which can occur when outside financing is required. Long-term sale and lease-back of plant or producing facilities offers another method for the oil producer to acquire additional funds for development work. Under this plan it is possible for the producer to sell full or partially depreciated equipment to the leasing company and immediately lease it back. Any capital loss or gain which is realized can be effectively utilized by the producer. Introduction Still prevalent today is the concept that pride of ownership of fixed assets is justifiable even when cost considerations might suggest equipment leasing. This is a survival of the notion that buying all the future services of a given property at once is a more natural procedure than buying such services as needed. Today, the process of obtaining the use of capital assets by lease rather than purchase is gaining acceptance in many phases of United States business, but it is still relatively unknown in the petroleum industry. Lease financing or leasing of equipment has had a tremendous growth since the early 1950's not only in volume, but also in the types of equipment which can be leased. One company recently announced a "new milestone in American business finance", which turned out to be a program under which qualified applicants can lease money. This announcement pointed out the major advantage which the program offered over conventional equipment leasing-that the lessee was not restricted to a specific piece of equipment but could purchase any items he desired with the "leased" money. The equipment-leasing industry began to come into its own in 1952 and has had a substantial growth since that time. The dollar volume of equipment on lease, excluding transportation equipment and business machines, has grown from $40 million in 1954 to $500 million in 1960, as shown in Fig. 1. The industry estimates that it should exceed $1 billion by 1965. Approximately $330 million of the 1960 business was handled directly by equipment manufacturersThe remaining $200 million represents the contribution of the leasing companies who do no manufacturing themselves but who buy the equipment from manufacturers for lease to customers. JPT P. 355^