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There's a wrinkle emerging that may provide us with some flexibility moving forward. Today I'm going to show you how to pinpoint opportunities and then how to profit from them.
You see, with West Texas Intermediate (WTI, the benchmark traded in New York) prices north of $70 to $75 a barrel, the traditional practice of rolling forward debt used for operating expenses had been the normal process for many U.S. companies.
Remember, we don't need oil prices to rise to $70 or above to make money from the coming wave of M&A. The trick is to identify those companies likely to benefit from the revision in funding structures.
Increasing Demand for Oil Will Have to Be Met
The cost of new debt (if companies can even acquire it) is becoming prohibitive.
Debt costs are the fastest rising reason for a new cycle of M&A.
Aside from the state producers in the leaders of OPEC (Saudi Arabia, Kuwait, and the United Arab Emirates), few companies anywhere on Earth can finance the next round of projects with petty cash.
But given that global demand is still rising and production will be needed, where is the money going to be sourced?
Subdued market prices, surplus production, and the Chinese situation are all being lauded as the reasons for supply-side concerns. But on the other side, demand is not declining. In fact, and despite some volatility in numbers, both the OPEC Secretariat in Vienna and the International Energy Agency (IEA) in Paris are pointing toward record global daily demand by the end of this year.
That means, regardless of what price per barrel is being set in New York and London, refineries (the primary end user of crude oil) will still need guaranteed volume flows. Some companies will survive the current malaise and even register profits… but they still need to finance forward projects.
The new financing arrangements taking form amount to a twist on what used to be the primary way solvent international companies would finance most of their future projects. Recall that until recently, credit lines were the main financing instrument. But that would not always mean floating junk bonds at unsavory double-digit interest, as most companies face these days.
Rather, the process would usually go something like this. An experienced company with a track record of successful projects would secure a line from a lead bank. The bank would then syndicate that credit with other banks to lower the individual institution's exposure to risk.
How Oil and Gas Operations Are Being Funded
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.