Key Concept Exercise: Financing Configurations
UK Oil & Gas (UKOG) is a small publicly traded firm that operates in the United Kingdom (Moylan, 2015). In 2015, it invested in the Horse Hill Project to explore the onshore oil site located near Gatwick Airport (Moylan, 2015). Despite the forecasted opportunities associated with the exploration of the oil site, UKOG had no resources to fund the project (Moylan, 2015). From this point, it is important to discuss the financing configuration that would become the most appropriate one for the Horse Hill Project.
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It is possible to determine several financing configurations that can be used by companies to sponsor their oil exploration and production activities. First, companies can borrow money from banks and other financial institutions (Key concept overview, 2015). Executives can also focus on the possibilities of public or private equity to receive enough resources and sponsor their operations and activities (Key concept overview, 2015).
In addition, the investors’ interest in a company or project depends on the credit rating (Weijermars, 2011). From this point, project funding is another option that can be selected by companies and investors with reference to the results of evaluating the project and predicted perspectives (Dunkerley, 1995; Key concept overview, 2015).
Thus, for the case of the Horse Hill Project, the most suitable financing configuration is project funding. The reason is that UKOG is a publicly-traded company that depends on public equity, but more investment is necessary (Moylan, 2015). In 2015, the Horse Hill Project was only at the initial stage of its development, and positive predictions regarding drilling about 100 billion barrels of oil in the site required further investigation and exploration operations (Moylan, 2015). As a result, there were no guarantees of the project’s success, and risks were high.
Still, the exploration results along with predictions regarding the increased role of oil in the market could contribute to improving the company’s status and reputation (Holditch and Chianelli, 2008). Therefore, project funding could be viewed as the most advantageous option for the case that was associated with high risks for investors. Researchers state that when risks are high, and investors do not choose private equity options, they often refer to project investment, and only then, they can choose to take the company private (Dunkerley, 1995; Key concept overview, 2015).
It was possible to speak about focusing on public or private equity after supporting the idea that the onshore oil site was as significant as it had been predicted. However, at the initial stage, it was important to attract domestic investors who were interested in sponsoring the project to gain more from private equity in the future (Dunkerley, 1995). In the case of the Horse Hill Project, the domestic private investment could be more beneficial for all parties than the foreign private investment because of the predicted outcomes (Key concept overview, 2015). Therefore, project financing with the focus on domestic investment can be viewed as an appropriate choice for the discussed case.
Dunkerley, J. (1995) ‘Financing the energy sector in developing countries: context and overview’, Energy Policy, 23(11), pp. 929-939.
Holditch, S. and Chianelli, R. (2008) ‘Factors that will influence oil and gas supply and demand in the 21st century’, MRS Bulletin, 33(4), pp. 317-323.
Key concept overview: operational issues (2015) Liverpool: Laureate Education, Inc.
Moylan, J. (2015) Oil discovery near Gatwick airport ‘significant’. Web.
Weijermars, R. (2011) ‘Credit ratings and cash-flow analysis of oil and gas companies: competitive disadvantage in financing costs for smaller companies in tight capital markets’, SPE Economics & Management, 3(2), pp. 54-67.