Slumping oil prices are shutting the door to stock market listings for small oil and gas firms, forcing many to tap more costly forms of financing or to shelve projects and wait for better times.
Initial public offerings (IPOs) in the oil and gas sector worldwide have dwindled since crude started sliding in June. The amount raised through listings in the second half of 2014 fell 63 percent from the first six months of the year to $3.8 billion, Thomson Reuters data showed.
Energy company listings shelved since July include Dubai’s oil-rig contractor Shelf Drilling, which was planning to list on the London Stock Exchange, and Samudra Energy, which owns oil and gas interests in Indonesia and was eyeing a listing in Singapore.
“Projects and IPOs are being cancelled and companies are stopping and thinking what they’re going to do next,” Ashley Wright, energy partner at legal firm Norton Rose Fulbright in Singapore, said.
Since July, only one oil and gas producer or explorer, Savannah Petroleum, has listed on Britain’s Alternative Investment Market (AIM), a traditional source of funding for many small energy firms, according to accountancy firm UHY Hacker Young.
Advisers and bankers warn that new listings may stop completely this year as crude languishes near its lowest level since 2009 at just below $50 dollar a barrel, eating into the profit of producers and forcing oil majors to cut spending on exploration and machinery.
“I don’t think we’re going to see many, if any, resource AIM IPOs in 2015, certainly not in oil with the price at $50,” said Chris Searle, capital markets partner at adviser BDO UK.
In the face of sliding oil prices, the first line of defence for oil explorers and producers has been to cut costs, trim expansion plans and seek alternative sponsors and lenders, ranging from commodity trading houses and exchanges to suppliers and prospective clients.
For instance, an oil and gas producer can raise the money it needs to develop a field by agreeing to sell future production to a trading firm at a discount to the benchmark price.
As the price of oil falls and financing opportunities dry up, however, the borrower needs to commit a larger quantity of oil for the same amount of cash. It may also face demands to accept larger rebates in new negotiations.
“With an oil price that has been divided by two, we need twice the amount of oil to be able to amortise the same facility,” Christophe Salmon, chief financial officer for Europe, the Middle East and Africa at commodities trading firm Trafigura.
Explorers are also seeking to share the cost of projects by looking for partners who can bring in money and expertise in return for a share of the asset.
In the current environment, however, this is proving tricky, even for some relatively established firms. Trap Oil said earlier this month it was relinquishing some of its licences after failing to find a partner.
“Most explorers would be looking to farm out, so bring other industry partners into the asset,” said William Arnstein, head of oil and gas at natural-resource focused investment bank Fox-Davies.
“But there hasn’t been much activity and we’ve seen a number of companies not being able to execute the farm-out.”
None of these forms of fund raising are a real substitute for a public listing, however, as it brings equity, rather than debt, into the company and allows for longer-term planning.
But with the outlook for oil prices still cloudy, private equity and industrial buyers remain on the sidelines for now.
“People are still coming to terms with the current situation,” Norton Rose Fulbright’s Wright said. “It will take a while for the market to react and to adjust for things that are direct swaps for IPOs.”