Financing For Oil and Gas Companies
There has been much debate in recent years concerning the oil and gas industry, especially after the major environmental disasters that the oil and gas industry has played a part in. The oil and gas companies are facing many difficult situations, predominately with sustainability pressures and cost and investment concerns, that are forcing more scrutiny towards the oil and gas industry, as well as dealing with the many transitions that are vital to staying successful in this complicated industry.
The oil and gas industry is considered one of the biggest industries in the world today (in terms of dollar value), which means the oil and gas industry typically contributes a significant amount towards the national Gross Domestic Product. The oil and gas industry is often considered a global powerhouse, reinforcing the vital role they have, and continue to play, in the world today. The oil and gas industry also is the leading industry in employment, employing over 173 thousand people, as of November 2016, in the United States alone – if we consider this number globally, it is upwards of a couple million people. Unfortunately, the oil and gas industry has seen some incredibly difficult times in the past few years, leading to major layoffs. By November 2015, it is estimated that around 94 thousand people had been laid off by a variety of oil and gas companies in the United States. This is an ongoing battle for the oil and gas industry, but many major players in the oil and gas sector are attempting to implement new strategies and trends to alleviate the many issues plaguing the industry today.
There are three key areas that make up the oil and gas industry – upstream, midstream, and downstream. Upstream, otherwise known as exploration and production (E&P), is the searching of, recovery, and production of crude oil and natural gas. This typically consists of underwater and underground searches for natural gas and crude oil fields, as well as the drilling of exploration wells and established wells to find oil and gas. Midstream, which is often lumped together with downstream processes, consists of the collection and transportation of the crude oil and natural gasses collected during the upstream process. After this is accomplished, the downstream systems begin. Downstream consists of the manufacturing, selling, and distributing of the natural gas products produced from the crude oil; this is often referred to as refining. The downstream process also includes the marketing and commercial distribution of these products to consumers; the products consist of natural gas, diesel oil, petrol, gasoline, asphalt, and so much more. The largest volumes of products produced by the oil and gas industry that has become integral to many industries, countries, and consumers is petroleum (petrol).
Oil Industry Statistics
Since the early 1800’s, the United States has been producing oil and gas, and by 2015, the United States was producing over 12 million barrels of oil and 767.3 cubic meters of natural gas per day. 2015 was also a major year of achievement for the United States oil and gas industry, becoming the ninth-largest oil reserves and the fifth-largest natural gas reserves; this correlates with the U.S. also being the world’s largest oil and gas consuming nation, consuming over 19 million barrels of oil and 778 billion cubic meters of natural gas per day in 2015. Unfortunately, 2015 also marked a major turning point for the oil and gas industry as well. Gas and oil prices are at an all new low, which unfortunately, is a trend that is expected to continue – especially with the excess supply that has already been produced, resulting in a decrease in production across the industry. The oil and gas industry has seen better times and continues to face many threats to the industry, however many oil and gas companies are implementing new, strategic trends into their business practices to stay successful.
Oil and Gas Company Trends
The oil and gas industry originated from a period when there was major resource scarcity, leading to the development of these organizations to retrieve those hard to find resources. The oil and gas businesses relied heavily on a strategic system with complex organizations to successfully achieve this end goal, but the world is at a turning point now. The dependence on the oil and gas industry is still thriving today, but with new technologies and a constantly growing concern for climate change are forcing the major oil and gas companies to reevaluate the long standing, traditional ways of operating in this industry. Some of the major trends that major companies are starting to implement include:
- Growth and Niche Areas: Many oil and gas companies delved into the complicated waters of attempting to do it all – such as exploration firms trying to also integrate production into their businesses. This has been seen in upstream, midstream, and downstream companies in the past few years, but with the recent layoffs and cost cutting measures, many oil and gas companies are finding that they simply cannot do it all. The biggest trend that oil and gas companies are becoming aware of today is the focus towards finding the best niche and growth area for their company to focus on. Missteps and overreaching into multiple areas of the oil and gas industry has left many businesses struggling to adapt to changing industry conditions. For growth, oil and gas companies must be reviewing business strategies to figure out where their strongest area of expertise is, and what area will also be able to adopt to changing market conditions and government regulations.
- Cost Cutting and Investment: The oil and gas industry reacted to price drops by implementing major cost cutting strategies, such as major layoffs. This allowed oil and gas companies to have some breathing room for a bit, but for long term results, this drastic action has left many oil and gas businesses unprepared for the uncertain future ahead. Another major trend that successful oil and gas companies are noticing is the strategic investment into more sustainable programs – this is a key area where oil and gas companies will notice growth, even if it is incremental for the time being.
- New Technology: Innovation is essential in the oil and gas industry; there has been reluctance from many oil and gas businesses today to make the transition into newer technologies and more sustainable business ventures. However, these major transitions are key to staying successful during this transformation period for the oil and gas industry. Major technologies being invested in and implemented into day to day operations to reduce costs, employment constraints, and increase productivity consist of: new cloud based systems, mobility systems, the Internet of Things, and other various digital technologies.
- Sustainability and Regulations: After the United States formally joined The Paris Agreement, oil and gas companies have been struggling to decide what the next steps are. The Paris Agreement’s main goal is to limit global warming below 2 degrees Celsius to increase economic and social ability to adapt to extreme climate – a major commitment from all the countries involved. This is leading to many new regulations being considered, or already put in place, to limit the use of unsustainable resources. Studies are already showing the drastic decrease in coal and other resources by 2040. Oil and gas companies must start, if they have not already, evaluating the next steps in complying with these regulations while attempting to keep their businesses thriving.
Types of Oil Company Loans
|Bank||6-10%||3-7 years||14-30 days|
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
Oil Company Bank Loans
Its not easy to obtain a traditional loan if your an oil or gas company because of increased scrutiny of the industry, but if your oil and gas company has great credit and sufficient documentation, then a conventional bank loan is always the best choice. Conventional financing allows oil and gas businesses to enjoy the best rates and longest terms of all other forms of financing.
- Rates: 5-10%
- Terms: 1-25 years
Alternative Oil Company Loans
Alternative lending is another good source of financing for an oil and gas company if you cannot obtain conventional bank loans or SBA financing. Alternative lenders are able to approve a business much faster than traditional lenders and only require minimal documentation.
- Rates: 9-25%
- Terms: 1-5 years
Oil Company Cash Advance
Sometimes, as a business owner, you simply cannot wait for the long process of traditional financing. Oil and gas cash advances allow you to access funding quickly, but this form of funding typically comes with higher rates and fees. Merchant cash advances are also not technically loans, but the sale of the oil and gas company’s future revenue in return for upfront capital.
- Factor Rates: 1.16-1.50%
- Terms: 4 months – 2 years