A Time to Act  High Prices Create Opportunity

As printed in the October, 2001 PetroGrowth Advisors Newsletter

My wife loves the phrase "Same, but different".  Usually this phrase perplexes me for it appears to be double-speak, but when applied to the current energy industry, it is quite appropriate. 

 

Reflect back to just over two years ago when oil prices hovered around $10.  There was a paralysis in the industry  no one wanted to sell at such low prices and capital was running away as fast as possible.  This resulted in very few transactions of any type.  Now advance to today's environment and, in many ways, the 'same' situation as two years ago is being experienced - again there are minimal transactions being completed.  The only divestitures being completed are a result of exorbitant debt levels and the banks forcing a sale.  Additionally, only negligible equity placements are being completed.  As was the case two years ago, valuation continues to be the main driver of this inactivity  brought on by a huge gap between actual prices and historical prices. 

 

• Enjoy the cash. Many operators are enjoying record cash flows by reducing or re-financing debt levels or developing their properties.

• Sell some or all of the property base. An obvious truism is that you should sell at a market high, which current commodity prices now allow. While the market is still not so hot that full value may be realized for PUDs, it is a great time to sell oil properties with high lifting costs. Rising tides lift all boats, and high oil prices certainly make high LOE properties more attractive. Combine pricing with buyer's great cash flows and need to get larger; this is an ideal time to sell.

• Financial recapitalization. Take advantage of the high prices and extract liquidity from your property base. Several ways exist to achieve this. By examining your company and individual situation (especially tax and operating factors), the best option is uncovered. A financial recap allows for owners to have their initial capital to be returned and additional profits to be distributed in a very cost-effective way.
  

The key in determining a company's strategy is to realize the obvious  things will change.  For the oil industry, the most likely factors to change will be commodity prices and availability of capital. Presently both are available, but at some point it won't be the same, but will be different.  Take advantage of the current market to take some money off the table, add capital to the company, or create a better balance sheet.