FINANCIAL STRATEGIES In OIL

FINANCIAL STRATEGIES IN THE OIL EXPLORATION AND PRODUCTION INDUSTRY

The oil and gas exploration and production industry is a high-risk, high-capital industry. It is an international industry in which some nationalized companies compete with private companies, and where political pressure is often brought to bear. It is capital intensive because of the cost of the equipment required to find and extract oil and gas; although equipment can sometimes be reused, the logistical and transportation costs associated with moving equipment from one site to the next can be formidable. In addition, while technology has decreased the risk of test drilling so that dry sites are more rare than in the past, highly promising sites can still result in bitter disappointment. This is not an industry that is easy to enter for new competitors, nor is it an industry that attracts those with a low threshold for risk. Creditors can be especially wary of these conditions, and so raising the capital necessary to remain competitive in this industry can be challenging. This research examines the peculiarities of the oil and gas exploration and production industry, with an emphasis on the capital financing strategies employed within the industry and an evaluation of how those strategies affect the long-term performance of companies in the industry.

Most of the companies participating in the oil and gas exploration and production industry are divisions or subsidiar

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penditures was attributed to a worldwide decline in oil prices; this makes it less attractive to invest in new sources of oil when the price for that oil drops significantly ("Upstream" 8). FINANCIAL STRATEGIES The oil companies have significant cash flows that can be used to finance exploration and production activities. In addition, publicly held companies can use new equity issues to fund new activities. Private and public companies also make use of bonds and bank loans to fund their capital expenditures. Joint ventures are also common, where two companies will join together to form a third company to participate in these activities ("Global E & P" 5). Royal Dutch Shell uses primarily dollar-denominated bonds to finance its capital expenditures; in 2002, $6.3 billion in debt was outstanding, with $5.5 billion in bonds and the rest in loans from banks. Of those bonds, the average interest rate was four percent, and $5.16 billion were denominated in dollars ("Royal Dutch Shell 2002 Annual Report" n.p). ExxonMobil follows a similar strategy to Shell, with the majority of its longterm debt resting in bonds--just over $6 billion in 2002--and the majority of these bonds denominated in the dollar--$5.9 billion ("ExxonMobil 20

Category: Business - F